Document of The World Bank

FOR OFFICIAL USE ONLY

Report No. 39595-BD

INTERNATIONAL DEVELOPMENT ASSOCIATION

PROGRAM DOCUMENT

FOR A PROPOSED CREDIT

IN THE AMOUNT OF SDR 132.2 MILLION (US$200 MILLION EQUIVALENT)

TO

THE PEOPLE’S REPUBLIC OF BANGLADESH

FOR A

DEVELOPMENT SUPPORT CREDIT IV

April 27,2007

Pover t y Reduct ion and E c o n o m i c Management South A s i a R e g i o n

Th is document has a restricted distribution and may be used by recipients only in the performance o f their off icial duties. I t s contents may not otherwise be disclosed without Wor ld Bank authorization

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GOVERNMENT FISCAL YEAR July 1 - June 30

CURRENT EQUIVALENTS

Currency Unit = Bangladeshi Taka (Tk) US$1 = Tk 68.90 (March 2007)

ACRONYMS AND ABBREVIATIONS

ACC Anticorruption Commission ADP Annual Development Program AL Awami League ATC BBS Bangladesh Bureau o f Statistics BCIC Bangladesh Chemical Industries

BCS Bangladesh Civi l Service BDWD Bangladesh Water Development Board BEPZA Bangladesh Export Processing Zones

Agreement on Textiles and Clothing

Corporation

BERC BNP BPC BPDB BPSC BRAC BTRC

C&AG CAS CPI CPTU CTG DESA

Authority Bangladesh Energy Regulatory Commission Bangladesh Nationalist Party Bangladesh Petroleum Corporation Bangladesh Power Development Board Bangladesh Public Service Commission Bangladesh Rural Advancement Committee Bangladesh Telecom Regulatory Commission Comptroller and Auditor General Country Assistance Strategy Consumer Price Index Central Procurement Technical Unit Caretaker Government Dhaka Electric Supply Authority

DESCO Dhaka Electric Supply Company L td D P L Development Policy Loan DSC Development Support Credit DFID Department for International Development EC Election Commission EMTAP Economic Management Technical

Assistance Project e-GP E-Government Procurement ERC Energy Regulatory Commission FCB Foreign Commercial Bank FRP FY Fiscal Year GDP Gross Domestic Product GOB Government o f Bangladesh HIES HR Human Resource

Financial Recovery and Restructuring Plan

Household and Income Expenditure Survey

ICT IDA IFC IMF IPP IPSAS

LGED LTU JAO JSAN MATT MDG M&E M I S MOU MTBF NBR N C B NPFP NPL PAC PCB PEDP PFM PFMIP

PGCB PPR PRGF PRS QR REB RHD RMG SDR SEDF SLR SOE SWAP VAT

Information & Communications Technology International Development Agency International Finance Corporation International Monetary Fund Independent Power Producer International Public Sector Accounting Standards Local Government Engineering Department Large Taxpayer Unit Judicial Administrative Officer Joint Staff Advisory Note Management at the Top Training Millennium Development Goal Monitoring and Evaluation Management Information System Memorandum o f Understanding Medium-Tern Budgetary Framework National Board o f Revenue Nationalized Commercial Bank National Poverty Focal Point Nonperforming Loan Public Accounts Committee Private Commercial Bank Primary Education Development Program Public Financial Management Public Financial Management Improvement Plan Power Grid Company o f Bangladesh Public Procurement Regulations Poverty Reduction Grant Facility Poverty Reduction Strategy Quantitative Restriction Rural Electrification Board Roads and Highways Department Ready-Made Garment Special Drawing Right South Asia Enterprise Development Facility Statutory Liquidity Ratio State-Owned Enterprise Sectorwide Approach Value Added Tax

Vice President: Prah l Patel, SARVP

Sector Director: Sadiq Ahmed, SASPR Sector Manager: Kapi l Kapoor, SASPR

Country Director: Xian Zhu, SACBD

Task Team Leader: Sandeep Mahajan, SASPR

FOR OFFICIAL USE ONLY TABLE OF CONTENTS

Credit and Program Summary .................................................................................................................................. i I. Introduction ...................................................................................................................................................... 1 11. Recent Political Developments. ........................................................................................................................ 4 111. Recent Economic Developments ..................................................................................................................... .5 IV. Aligning The Bank Group’s Strategy with Bangladesh’s Poverty Reduction Strategy ............................. 8 V. Bangladesh’s Policy and Institutional Reforms Supported by the DSC Series ......................................... 10

............................................ 11 ement Systems ................... 12

A. Strengthening Core Governance .................... .................................................................... 10 Strengthening and Modernizing Revenue Administration ............... Strengthening Expenditure Management and Upgrading Financial Toward a More Responsive and Efficient Public Administration. .............................. Streamlining and Reducing Scope for Discretion in the Regulatory Environment ..... Establishing and Operationalizing an Independent Anti-Corruption Commission (ACC) .................... 16

B. Strengthening the Investment Climate ....................................................................................................... 16 Ensuring Continued Macroeconomic Stability

.......................................... 17 Improving Financial Sector Accountability, Transparency, and Pe ce ...................................... 18 Addressing Infrastructure Constraints: Emphasis on the Energy Sector ......

VI. The Proposed Fourth Development Support Credit and Priorities for the Next Phase ........................... 23 Priorities for the Next Phase of Reforms ......................................................................... 28

VII. Implementation Arrangements ..................................................................................................................... 31 Monitoring and Evaluation .................................................................................................................... 3 1 Credit Administration, Disbursement and Auditing ............................................................................... 32 Environmental Issues ................................... 33

VIII. Benefits and Poverty and Social Impact of Proposed Reforms .................................................................. 34 IX. Key Risks............................................................... .......................................................................................... 35

............. Reforming the Civil Justice System ....... ......................... ...... 16

Progress on Trade and Exchange Liberalization .............................

ANNEXES

Annex 1: Bangladesh Medium-Term Structural Reform Policy Matrix FYO4-OS .............................................. 37 Annex 2: Good Practice Principles on Conditionality ............................................................................................ 44 Annex 3: Bangladesh at a Glance ............................................................................................................................. 45 Annex 4: Statistical Annexes .................................................................................................................................... 41 Annex 5: Letter of Development Policy ................................................................................................................... 53 Annex 6: Statement of Loans and Credits..................... .......................................................................................... 64

MAP IBRD No. 33368

Task Team Sandeep Mahajan (Task Team Leader), Shamsuddin Ahmad, Sakuntala Akmeemana, G.M. Khurshid Alam, Oxana Bricha, Jose Edward L. Campos, Adriana Jordanova Damianova, Raihan Elahi, Syed Mynuddin Hussain, Zahid Hussain, Md. Iqbal, Zafrul Islam, Bala Bhaskar Naidu Kalimili, Alma Kanani, Mehar Akhter Khan, Farria Naeem, Syed Nizamuddin, Zaidi Sattar, Kiatchai Sophistienphong, Alan F. Townsend, Kishor Uprety and Suraiya Zannath.

Vinaya Swaroop (Lead Economist for Bangladesh) provided overall guidance to the Task Team.

Peer Reviewers: Sanjay Pradhan (Sector Director, PRMPS) and David Rosenblatt (Lead Economist and Sector Leader, LCSPR).

This document has a restricted distribution and may be used by recipients only in the performance o f their off icial duties. I t s contents may not be otherwise disclosed without Wor ld Bank authorization.

CREDIT AND PROGRAM SUMMARY

THE PEOPLE’S REPUBLIC OF BANGLADESH DEVELOPMENT SUPPORT CREDIT I V

Borrower:

Amount:

Terms:

Description:

Benefits:

Risks and Mitigation Strategy:

The People’s Republic o f Bangladesh

SDR 132.2 mi l l ion (US$200 mi l l ion equivalent)

Standard IDA terms; 40-year maturity and a 10-year grace period

The proposed IDA Credit i s the fourth in a planned series o f programmatic operations, called the Development Support Credit (DSC) series in the Bangladeshi context. The DSC series has complemented a parallel SDR 347 mi l l ion Poverty Reduction Grant Facility (PRGF) program o f the IMF, due to be completed in June 2007. The proposed DSC I V operation, just l ike the previous DSCs, supports implementation o f the Government’s development strategy as la id out in i t s Poverty Reduction Strategy (PRS). In particular, DSC-supported reforms have sought to (a) strengthen core governance functions, with emphasis on reforms in public procurement, budget formulation and budget execution, and tax administration; and (b) improve the investment climate, by maintaining macroeconomic stability, deepening domestic deregulation and trade liberalization, and strengthening performances o f banlung and energy sectors and state-owned enterprises.

The economic and social benefits associated with the DSC-supported reform program are apparent: the poverty rate fe l l by 9 percentage points between 2000- 2005, a roughly 1.8 percentage points annual decline, economic growth at 6.7 percent i s at historically high levels, and progress o n meeting most o f the MDGs i s on track. Growth has benefited f rom macroeconomic stability, trade liberalization, regulatory and banlung reforms, and more efficient public expenditure management. Broad-based governance reforms targeted at strengthening core governance functions are expected-ver the long-run-to improve public service delivery, reduce systemic corruption, and strengthen the business environment. All o f these areas o f reforms have been supported by the DSC series.

Political R i s k s : The sustainability o f the reform process put in train by the Caretaker Government (CTG) i s ultimately l inked to the smoothness o f the polit ical transition. The CTG i s malung good efforts to create conditions conducive to free and fair parliamentary elections, yet the timing o f the elections remains a bit uncertain: the C T G has indicated that elections will be held before the year 2008 i s over. The CTG enjoys widespread public support, but i t may erode if elections are postponed indefinitely. The bilateral development partners are tahng the lead in workmg with domestic civic organizations and with the government to help an early and smooth retum to democracy. The Bank has also remained in close contact with the reform-minded members o f the two major political parties to ensure broader political support for the DSC-supported reforms. Both parties agree on the broad reform priorities supported by the DSC operation. In addition, to influence the sustainability and deepening o f the reforms, the timing, scale, and scope o f future budget support operations would be l inked to continued commitment o f the Government to the reform process.

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Fiduciary Risks: Fungbility o f funds implies that budgetary resources may b e diverted or misused, which poses a particular risk to operations such as DSC IV. The Government, however, has a good record o f allocating public spending to the key development sectors. To further mitigate the risk, auditing arrangements and financial management within government ministries are being strengthened with DFID’s assistance. Implementation o f the new procurement l aw should further reduce the scope for misuse o f budgetary funds. External oversight by the Comptroller and Auditor General’s (C&AG’s) office i s also being strengthened. To enhance the safeguard framework, Bangladesh Bank has started strengthening i t s financial management with support from the IMF and the IDA-supported Central Bank Strengthening Project. Implementation capacity risks: Implementation capacity i s a serious bottleneck in Bangladesh, suffering f rom centralized public administration and unsatisfactory performance o f the c iv i l service. Ongoing reforms in public administration to strengthen c iv i l service incentives and quality, accountability, and training will be useful. The Bank and other development partners are also providing technical assistance to strengthen capacity in a number o f core areas o f economic management, including banlung, taxation, budget planning, and the energy sector. Economic Risks: The main economic risk stems from the weak financial condition o f state-owned enterprises (SOEs), especially those in the energy sector. Sustained large losses o f the energy sector SOEs have led to a build-up o f outstanding liabilities at these SOEs and exacerbated the financial fragilities o f the nationalized commercial banks (NCBs) that are directed to finance their losses. The Bank has worked closely with the government on this issue, continually encouraging depoliticization o f price adjustment, and providing on-demand analytical notes to help in form the government’s decision. Authorities have already responded by implementing power tariff increases in March 2007 and fuel price increases in April 2007 to stem losses at the Bangladesh Petroleum Corporation (BPC) and the Bangladesh Power Development Board (BPDB), respectively. However, BPC i s s t i l l unable to service i t s large outstanding debt burden, mostly to the NCBs, which would need to be resolved. Authorities have recently also significantly reduced BPDB’s payment arrears to independent power producers (IPPs) and stepped up efforts to recover power utilities’ accounts receivables. They have further expressed their commitment to closing the remaining pricing gap and, in the interim, to providing explicit support f rom the budget to BPDB to put the power sector back on financial recovery path. Implementation o f the Financial Recovery and Restructuring Plan (FRP), which GOB recently adopted in principle, should also help alleviate the financial burden on the power utilities. Finally, the Government i s considering divesture o f the loss-making national airline, Biman, through a strategic partner or other appropriate means, and has sought technical assistance from i t s development partners to support this move. Another important source o f economic vulnerability i s the persistently l o w tax mobilization. To address this, authorities would need to step up implementation o f the tax administration modernization program (being supported by DFID and IDA) along with legislative reforms to correct major tax policy distortions and strengthening o f customs administration.

SDR 132.2 mi l l ion (US$200 mill ion) disbursed in a single tranche upon credit Estimated Disbursement: effectiveness.

Project ID Number: PO7480 1

11

INTERNATIONAL DEVELOPMENT ASSOCIATION PROGRAM DOCUMENT FOR A

TO THE PEOPLE’S REPUBLIC OF BANGLADESH PROPOSED FOURTH DEVELOPMENT SUPPORT CREDIT (DSC-IV)

I. Introduction

1. Bangladesh, a country of about 150 million people, has made remarkable progress in reducing poverty over the last 15 years. In early 1990s, close to 60 percent o f the population was living in poverty; this number was reduced to 40 percent by 2005. The 1.8 percentage point annual decline in the poverty rate f rom 2000 to 2005 was a significant improvement over the 1 percentage point annual decline during the 1990s. Moreover, the decline in poverty was accompanied by a modest change in expenditure inequality. If the current rate o f poverty reduction continues, Bangladesh will meet i t s Millennium Development Goal (MDG) o f reducing the poverty rate to 29 percent by 2015.

2. Progress has also been good toward achievement of several other MDGs.‘ Bangladesh i s on- track in meeting i t s MDG on gender parity, having already achieved the goal in primary and secondary schooling. The under-five mortality rate has fallen f rom 136 deaths per 1,000 l ive births in 1990 to 66 today. This rate i s considerably lower than in neighboring India, even though Bangladesh’s per capita gross domestic product (GDP) i s about ha l f the size o f India’s. Attaining the MDGs relating to child malnutrition and those in education relating to universal net primary enrollment and primary completion remains challenging but within reach. Bangladesh had also nearly achieved the safe water MDG, with 97 percent o f i ts population having access to pathogen-free water, before arsenic contamination posed a new round o f challenges.

Significant gains have also been achieved in reducing child mortality.

3. Economic growth has been strong, averaging 5.7 percent from 2001 to 2006. This was one percentage point higher than in the 1990s and two percentage points higher than in the 1980s. Per capita GDP grew at 3.9 percent f rom 2001 to 2006; i t i s more than 70 percent higher today than in 1990. While GDP growth has benefited f rom better performances by al l major economic sectors, readymade garment (RMG) exports have played a crucial role. A sharp increase in remittances, mainly f rom the Bangladeshis living in the Gulf countries, has also been an important growth-enabling factor. I t has helped fue l a construction boom and i s one o f the main reasons for strong growth in the services sector.

4. Despite the good record, Bangladesh ’s development challenges are significant in their scale and scope. The f i rs t and foremost challenge i s o f weak governance. Until recently, many o f the key public institutions had been captured for private gain, which severely constrained the ability o f the oversight institutions to ho ld the executive to account. Perception-based indicators, including Transparency International’s Corruption Perception Index and the Wor ld Bank Institute’s Governance Indicators, have consistently placed Bangladesh at the bottom quartile o f their cross-country rankings. Fortunately, spurred by growing citizen demand for curbing corruption and the installation o f a competent caretaker government (CTG), the fight against corruption and weak governance has become the topmost priority for government policy. Moving swiftly and with determination, the C T G has undertaken some impressive actions aimed at reducing corruption and establishing better governance.

5. The country faces several social and economic development challenges. Bangladesh remains a low-income country, with per-capita GDP o f about US$460 in 2006. Poverty has fallen but progress has

For more information, see Government o f the People’s, Republic o f Bangladesh and United Nations, 2005, “Millennium Development Goals: Bangladesh Progress Report,” Dhaka; and World Bank, 2007, “To the MDGs and Beyond: Accountability and Institutional Innovation in Bangladesh,” Washington, D.C.

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been uneven across geographical regions. Some 60 mi l l ion people still l ive in deprivation, two-thirds o f them caught in extreme poverty. Adult ill iteracy i s persistent at about 50 percent and falling slowly, particularly among women. More than hal f the children aged one to three years o f age are underweight. Maternal mortality i s high as a result o f inadequate access to health services during pregnancy and childbirth and the poor nutritional status o f pregnant women. Attainment o f the MDGs on maternal mortality, sanitation, and environmental sustainability, therefore, appears to be a diff icult challenge.

6. Bangladesh’s geography poses a different set of challenges. One o f the world’s most densely populated countries, Bangladesh i s uniquely vulnerable to natural calamities-devastating tornadoes and severe floods. Almost ha l f o f the country’s dense population lives near sea level and 40 percent o f i t s land area i s flooded for three months each year, exposing large parts o f the population and agricultural land to the threat o f sustained climate change and resulting rise in sea levels: in fact, few other countries are as imperiled by climate change.2

7. Bangladesh’s development vision and strategic agenda for poverty reduction, outlined in the Government’s Poverty Reduction Strategy (PRsI),3 recognize these critical challenges. The PRS was presented to the Boards o f the International Development Agency (IDA) and the International Monetary Fund (IMF) in early 2006, and the two Boards agreed that i t provided a cohesive pol icy framework for implementing a pro-poor growth strategy. In supporting the implementation o f the PRS, and earlier the Interim PRS Paper, the Wor ld Bank has provided a series o f budget support programmatic operations in the form o f Development Support Credits (DSCs). The proposed credit for $200 mi l l ion i s the fourth o f this series. The DSCs have complemented a parallel Special Drawing Right (SDR) 347 mi l l ion Poverty Reduction Grant Facility (PRGF) program o f the IMF, due to be completed in June 2007.4 The Bank, in partnership with other development partners, i s also engaging the Government o f Bangladesh (GOB) on human development reforms through pol icy dialogue and lending under other complementary operations (including the Primary Education Development Program [PEDP], Education development policy lending [DPL], and Health sectorwide approach [SWAP]).

8. There is a wind of change blowing in Bangladesh. The new C T G that came to power on January 11, 2007, has moved decisively to begin to address the governance problems and aggressively carry forward the reform agenda. The CTG’s main goal i s to ho ld free, fair and credible national elections. In order to create an enabling environment for these elections, it has moved on two fronts. First, to remove the influence o f muscle power, it has started addressing the basic l aw and order problem. Those suspected o f involvement in criminal syndicates are being arrested, illegal arms are being seized, and prosecutions are being initiated. Second, the CTG i s acting to minimize the impact o f black money and corruption on the political process. Legal provisions with regards to asset disclosure are being enforced. The previously controversial Election Commission (EC) has been reconstituted and an ordinance has been passed to bar convicted persons from contesting elections. The EC i s in the process o f revising the voter l i s t which reportedly includes a large number o f fraudulent names. The anticorruption drive and efforts to improve governance fit in wel l with the electoral reforms because the main constraining factor on this agenda was the political environment.

9. The CTG has resuscitated several institutional reforms that were initiated under previous governments but had not been completed. Notable actions include (a) adoption o f rules relating to the Judicial Services Commission and amendments to the Code o f Criminal Procedure to separate the judiciary f rom the executive, and (b) reconstitution o f the Anti-Conuption Commission (ACC), set-up under the previous elected government but was yet to become functional. The A C C i s n o w vigorously

The Financial Times, 2007, “Bangladesh Plight Serves As Warning to World,” February 1. Government o f People’s Republic o f Bangladesh, 2005, Unlocking the Potential: National Strategy for Accelerated Poverty Reduction. The PRGF was supplemented in FY05 with an SDR 53.3 mil l ion Trade Integration Mechanism Facility.

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carrying out i t s activities. The previous government had begun to institutionalize important improvements in budget planning, tax administration, and public financial management (PFM), a l l o f which are being firthered by the CTG. In a particularly significant move, the last Parliament enacted a Procurement Law, consistent with international good practices, and preparation o f i t s implementing rules are now ongoing.

10. By their very nature, governance reforms have long gestation periods and require patience, perseverance and full ownership. For these reasons, they face constant threat o f being reversed or stalled. But the risk of reversal can be reduced ifkey elements of institutional reforms can be established early in the process. For example, more transparent and contestable processes for selecting and appointing high court judges and the Commissioners o f the EC and the A C C could be established. Whi le this may not guarantee manipulation o f reforms under elected governments, it will introduce better checks and balances and thus help contain potential risks. The CTG i s beginning to recognize the importance o f strategic selectivity and i s seelung advice f rom the Bank and other development partners on this critical matter. The Bank can, in turn, be useful in reminding the C T G o f the need to focus on the strategic elements, providing advice and guidance o n the said elements, and helping the CTG manage the public’s expectations, which can easily run far ahead o f reality.

1 1. On the economic policy front, the performance of the previous elected government was broadly good. Trade and exchange liberalization was deepened with average nominal protection falling f rom 29.4 percent in FY02 to 24.3 percent in FY07, virtual elimination o f trade related quantitative restrictions (QRs), and adoption o f a floating exchange rate regime in FY03. L o w fiscal deficits since FY02 together with limited domestic borrowing to cover the deficit ensured a sustainable fiscal situation. Monetary policy, after some in i t ia l laxity, has been tightened since early 2005 to contain exogenous inflationary pressures. The CTG’s commitment to persist with the economic policy reforms, especially by addressing the key challenges o f weak revenue mobilization, large energy sector losses and outstanding liabilities, and persistent inflationary pressures, t o keep the economy on a solid footing i s reassuring.

12. For all the positive aspects, there are also risks associated with the current political situation. A key risk has to do with the tenure o f the CTG, which i s s t i l l uncertain. Even though the CTG enjoys widespread public support, this may erode if elections are postponed indefinitely, which would, in turn, weaken the CTG’s abil ity to sustain the reform effort. However, assurances by the CTG to hold elections soon after the electoral system i s f ixed are encouraging.

13. The budgetary situation has been under pressure f rom sluggish revenue mobilization and the need to cover the large losses and outstanding liabilities o f the energy sector, which has constrained the fiscal space for the desired level o f development expenditure. The C T G has, therefore, requested speedy support f rom i t s development partners, including the Wor ld Bank Group, who are accordingly gearing up-financially and through technical assistance-to support the CTG in i t s bo ld reform efforts. The C T G has specifically requested the Bank to fast-track the proposed DSC IV operation.

14. T h i s Program Document lays out the reform program supported by the proposed DSC IV operation. In brief, the proposed credit supports GOB’S ongoing policy and institutional reform program aimed at ensuring overall macroeconomic stability, improving governance through effective institutions o f accountability and regulatory institutions, strengthening PFM functions, and improving service delivery in the banlung and power sectors. Support to these programs i s part o f the Bank’s Country Assistance Strategy (CAS), which in turn supports the country’s PRS.

15. The structure o f the rest o f the Program Document i s as follows. Section I1 summarizes the recent political developments and the associated risks. Section I11 summarizes economic progress and challenges facing the country. Section N details Bangladesh’s poverty reduction strategy that was prepared in November 2005 and notes how the Bank’s CAS, approved in 2006, i s aligned to it. Section V

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describes the status o f the overall medium-term development reform program supported by the D S C series. Section V I describes the progress under the proposed DSC IV operation and outlines priorities for the next phase o f reforms,. Sections VII, VIII, and IX discuss the issues concerning the operational implementation o f DSC IV, benefits and social impact o f the DSC-supported reforms, and key risks.

11. Recent Political Developments

16. Bangladesh is beginning to emerge from several months of political turmoil. As mandated by the Constitution, a CTG took charge on October 29, 2006, after the former Bangladesh Nationalist Party (BNP) Government stepped down. Under the Constitution, a neutral C T G i s appointed three months prior to each national election, with al l polit ical parties removed from the formal power structure. The transition had a diff icult start due to controversy over who should head the CTG. The resulting political stalemate spilled over into the streets in the form o f violent clashes. It was resolved through a move the legality o f which was questioned by many observers, when the President (who had hitherto held a largely ceremonial post) assumed the position o f Chief Advisor o f the CTG o n October 29,2006, which gave him widespread executive power. Sharp disagreements lingered between the two major r iva l parties-the BNP and the Awami League (a)-and their respective alliances over the polit ical neutrality o f the Election Commissioners and the authenticity o f the voter l ist. On January 3, 2007, the AL-led alliance announced i ts boycott o f the elections scheduled for January 22, and the alliance declared demonstrations and blockade programs a l l over the country. As preconditions for their participation, the alliance demanded major electoral reforms, especially reconstitution o f the EC and authentication o f the voter l ist, including preparation o f voter ID cards. It also wanted the President, who it viewed as not being neutral, to relinquish his role as Chief Adviser. The country was wracked by clashes between political opponents, protestors, and security forces, and by crippling strikes. The United States and European Union announced that they would not f ield observer missions to oversee a seriously compromised election; the United Nations also withdrew its assistance to the election process.

17. The stand-off and the escalating protests were resolved on January 11, 2007, when the President, reportedly under pressure f rom the armed forces and with large-scale public support, declared a State o f Emergency. H e called o f f the elections scheduled for January 22 and stepped down from the office o f Chief Advisor, while retaining the largely titular position o f President. H e appointed a former Bangladesh Bank Governor as the Chief Advisor. The new Chief Advisor i s perceived to be polit ically neutral and widely respected for his competence. H e has assembled a council o f advisers (the cabinet), with technocrats, former diplomats, and businessmen filling the key positions. The appointment o f a politically neutral CTG and the imposition o f a state o f emergency has calmed the situation. The new C T G has been wel l received by the people o f Bangladesh and the international community. I t has embarked upon the diff icult and somewhat cumbersome task o f creating the appropriate enabling environment for free and fair elections, with the support o f the armed forces. As noted earlier, the CTG i s moving proactively on a broad anticorruption agenda, while also undertakmg a number o f pending economic reforms. It has implemented a number o f long-pending economic policy reforms supported by the DSC series.’

1 8. Although a major political crisis has been averted and things are beginning to look positive, a number of risks remain. The C T G insists that i t i s only trying to create a level playing f ie ld for a l l parties for fair and credible elections, and has expressed i t s commitment to holding them as soon as that environment i s created. But the length o f i t s tenure and, therefore, the timing o f the general elections

’ For example, the CTG has taken the legal step to corporatize the three loss-making nationalized commercial banks. I t has also moved aggressively on a number o f long-pending governance reforms, and has taken important policy decisions to begin tackling the power sector crisis. All in all, it has reaffirmed the country’s poverty reduction strategy and taken actions consistent wi th it.

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remains a bit uncertain. The High Court recently instructed the EC to assess a new voter roll, voter ID cards, and transparent ballot boxes before organizing the elections. The EC, on its part, announced o n April 5,2007, that i t would need at least 18 months to implement the measures recommended by the High Court, and did not provide any specific timeline for the elections beyond the 18-month period. Furthermore, the C T G also draws i t s support f rom the armed forces, and the risk o f their deeper and prolonged involvement i s present and it womes many observers.

111. Recent Economic Developments

19. Economic growth remains strong. The economy grew by 6.7 percent in FY06, the highest rate in over two decades and the third consecutive year o f at least 6 percent growth (Table 1). Despite several months o f political turmoil, forecasts suggest 6.7 percent growth in FY07 as well. Growth has been broad-based, cutting across al l major economic sectors and benefiting f rom robust demand in both domestic and export markets. The manufacturing sector grew at an impressive 10.4 percent in FY06, its strongest performance in over a decade. Garment exports, which account for about 75 percent o f manufacturing exports, grew by 23 percent (in nominal dollar terms) in FY06. T h i s was despite enhanced competition f rom other low-cost producers after the dismantling o f the Agreement o n Textiles and Clothing (ATC) on January 1, 2005. Construction, fueled by strong manufacturing growth as wel l as large amounts o f remittance inflows, grew by an estimated 8.4 percent, maintaining i t s 8-plus percent growth record since FY94. Remittances through formal channels were recorded at nearly US$5 billion, which i s about 8 percent o f GDP and ha l f o f merchandize exports, compared with US$1.9 b i l l ion in FYO1.

Table 1: Summary Macroeconomic Indicators

Indicators N O 2 N O 3 F Y 0 4 N O 5 F Y 0 6 F Y 0 7 FYOS F Y 0 9 Actual Projections

Output and Prices Annual percentage changes Real GDP Growth 4.4 5.3 6.3 6.0 6.7 6.7 7.0 7.0 C P I 2.8 4.4 5.8 6.5 7.2 7.2 6.5 5.0

Exports (bil l ion US$) 6.0 6.5 7.0 8.6 10.4 12.5 15.0 17.1 Annual % change 4.6 9.5 15.8 23.2 21.6 19.9 19.9 14.1

Imports (bil l ion US$) (7.7) (8.7) (9.8) (11.9) (13.3) (16.0) (19.3) (21.8) Annual % change (2.5) (13.1) (13) (20.6) (12.1) (20.0) (21.2) (12.7)

External Outlook

Current account balance (% o f GDP) 0.5 0.1 -0.5 -0.9 0.6 0.5 0.2 -0.1 Gross off icial reserves (bi l l ion US$) 1.5 2.5 2.7 2.9 3.5 5.0 5.7 6.9 In months o f GNFS imports 1.8 2.9 2.8 2.5 2.7 3.0 2.7 3.2

Public Finance Percent of GDP Total Revenue 10.1 10.3 10.2 10.5 10.6 10.4 10.6 11.0 Total Expenditures 14.8 13.7 13.3 13.8 13.8 13.8 15.8 14.3 Overall balance (excluding grants) -4.6 -3.4 -3.1 -3.3 -3.2 -3.5 -5.2 -3.2 Domestic financing” 2.5 1.2 1.8 1.7 2.1 2.3 3.7 1.7 Public debt 53.0 51.1 48.7 47.5 46.8 44.3 43.9 42.2

Money and Credit Net Domestic assets 11.6 12.2 13.5 17.1 19.6 13.4 14.2 16.0 Private sector 13.6 12.6 17.5 17.0 18.3 15.1 14.5 14.2 Broad money (M2) 16.1 15.6 13.8 16.7 19.3 17.5 15.0 17.7

End ofyear; percentage change

Source: IMF and GOB. GNFS = Goods and nonfactor services. 1/ Includes estimated privatization receipts o f 0.2 percent o f GDP in FY07

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20. Macroeconomic stability has been broadly maintained. The fiscal, monetary, and external indicators have remained within the thresholds o f the macroeconomic framework agreed with the IMF under the PRGF program, although there have been some temporary deviations and revenue mobilization has persistently fallen short o f i t s targets. This i s a l l the more impressive given the pressures emanating f rom sustained high global o i l prices and rising food costs. Recognizing this achievement, the IMF's Executive Board approved the fifth and penultimate review o f the PRGF in October 2006.

k c e n t Trends in Sectoral Growth (annual %change)

Growth Trends In GDPand Per Capita Income

5

4

$ 3

2

1

0

mGDP Growth E G D P Growth Per Capita

21. Robust performances of exports and remittances have further strengthened the external sector. This, together with the floating exchange regime that was adopted in M a y 2003, has allowed Bangladesh Bank to stabilize foreign exchange markets and build up international reserves to more comfortable levels. In a significant turnaround, the current account balance moved from a US$5 18 mi l l ion deficit in FY05 to a US$572 mi l l ion (0.9 percent o f GDP) surplus in FY06. In addition to strong growth o f exports (22 percent) and remittances (25 percent), this was also enabled by a slowdown in import growth (10 percent), as authorities further tightened monetary management and refrained from intervening in currency markets to prevent depreciation o f the taka (Tk). The exchange rate has currently stabilized at just under Tk 70/US$, after depreciating against the U S dollar f rom Tk 63.7/US$ on June 30,2005, to Tk 72.0/US$ in November, 2006. Despite a sharp decline in the capital and financial account balance because o f repayments o f trade credits (mostly o i l import related), the balance-of-payments account recorded a surplus in FY06. This, in turn, allowed the foreign exchange reserves to build up to US$3.4 bi l l ion by end-FY06. More recently, as o f early March, 2007, the reserve position had reached an all-time record level o f US$4 b i l l ion (2.6 months o f imports cover).

22. Fiscal discipline was maintained with the budget deficit kept at 3.3 percent of GDP in FY06. T h i s was the fourth straight year in which the deficit-to-GDP ratio was kept under 4 percent. Slower than programmed implementation o f the Annual Development Program (ADP), in common with previous budgets, caused the ratio o f budget deficit to GDP to undershoot the programmed 4.0 percent. Tax revenues increased by just 13 percent, wel l short o f the 19 percent target. A s a ratio o f GDP, tax revenues remained unchanged at 8.5 percent-one o f the lowest collection rates in the world. A redeeming factor was the sharp increases in domestic Value-Added Tax (VAT) and income tax collections, both benefiting f rom the good performance o f the recently set-up large taxpayers unit (LTUs). But these gains were erased by a decline in customs revenues, as authorities were unable to improve efficiency in customs administration. A plethora o f tax exemptions that are in place prevented even more robust responses o f the income tax and VAT. Domestic financing o f the deficit was kept at 2 percent o f GDP, allowing the ratio o f public debt to GDP to fa l l for the fourth straight year, f rom 51 percent in FY03 to 47 percent. However, the budget deficit masks the overall fiscal situation because there are several state-owned enterprises (SOEs) with deteriorating financial situation.

6

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5 -

a 4 -

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23. The main source of risk to medium- to long-term fiscal sustainability is the financial losses of SOEs, especially those in the energy sector, although recent measures by GOB have sought to contain these. The losses o f the energy sector SOEs for FY06 are estimated at about Tk 45 b i l l ion (US$670 million), or 1.1 percent o f GDP. These losses stood at Tk 27 bi l l ion (0.7 percent o f GDP) in FY05, and just Tk 6 bi l l ion in FY04. The increase in losses was mainly due to underpricing o f energy products in domestic markets. The Bangladesh Petroleum Corporation (BPC) alone accounted for more than 80 percent o f the losses because o f inadequate pass-through o f the higher global energy prices to domestic consumers (see para 73), although this was corrected by the fuel price adjustment recently announced by the CTG. Furthermore, failure to adjust electricity tariffs between September 2003 and March 2007 caused losses at the Bangladesh Power Development Board (BPDB) to soar f rom Tk 1.2 b i l l ion in FY04 to an estimated Tk 9.9 bi l l ion (0.2 percent o f GDP) in FY06. T h e March 2007 increase o f 5 percent on urban electricity retail supply and 10 percent o n bulk supply i s expected to lower annual BPDB losses by about Tk 3.5 billion. Furthermore, recent efforts to recover accounts receivables o f power utilities and to significantly reduce BPDB's payment arrears to Independent Power Producers (IPPs) through budgetary transfers have also strengthened the power sector's financial situation. Biman, the national airlines, and Bangladesh Chemical Industries Corporation (BCIC), the public sector chemicals corporation, were the other main loss-makers. T o tackle the growing problem in Biman, the Government i s considering divestiture through a strategic partner or other appropriate means. It has also sought technical assistance from the Bank and other development partners to support this move.

(%of GDP)

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24. The losses o f the SOEs have exacerbated the fi-agilities at the Nationalized Commercial Banks (NCBs), which are directed to provide loans to these agencies. The capital shortfall in the NCBs amounts to about Tk 68 b i l l ion (around 1.5 percent o f GDP), which adds to the fiscal risk and makes future divestment o f these banks more expensive for the Government.

25. The need to tackle the large SOE losses and outstanding liabilities and continued sluggishness of revenue mobilization are putting a strain on the fiscal situation, thereby constraining the GOB'S ability to finance its strategic developmental priorities such as health, education, and infrastructure.

7

Faced with this, the CTG has requested the Bank to fast-track the proposed D S C IV budget-support operation to support i t s ambitious reform program.

26. Bangladesh Bank has prudently tightened monetary policy since early 2005, and is committed to further tightening as needed to ward off inflationary pressures. Some inflationary pressures have built up since 2004 because o f strong domestic demand, high commodity prices in wor ld markets, and rising food prices. After a sluggish init ial pol icy response, authorities have been tightening monetary pol icy since early 2005. Since March 2005, the cash reserve ratio and the statutory liquidity requirement (SLR) have been increased from 4.5 and 16 percent, respectively, o f time and demand liabilities o f commercial banks to 5 and 18 percent. Similarly, rep0 and reverse rep0 rates, and treasury bill yields have each sustained an upward trend since early 2005, although the rate o n the 28-day treasury bill i s s t i l l only barely keeping pace with the rate o f inflation. The commercial bank lending rate increased from a 10.5 percent average in June 2005 to 12.1 percent in December 2006. Despite tightening o f monetary management, private credit growth remains strong, reflecting underlying economic dynamism, while credit to the public sector has expanded even faster in order to finance the fiscal deficit and import o f petroleum products. The IMF has recommended M e r tightening o f the monetary pol icy to contain the rapid growth o f the monetary aggregates, and thus avoid overheating o f the economy.

27. I n sum, Bangladesh ’s macroeconomic management has been broadly sound, enabling strong economic growth while partially taming inflationary pressures. Looking ahead, authorities would be wel l served by further containing inflation with continued monetary discipline and measures to ease food supply chains, addressing the emerging fiscal stresses by regularly adjusting energy prices to eliminate SOE losses, and deepening the reform efforts to strengthen revenue mobilization. The C T G has acknowledged these issues and i s taking a number o f corrective policy actions.

IV. Aligning The Bank Group’s Strategy with Bangladesh’s Poverty Reduction Strategy

28. Bangladesh’s development vision has been detailed in i t s PRS that was released in November 2005. The PRS stresses the links between investment, growth, j o b creation, and poverty reduction. I t identifies key areas where reforms are needed, public investments are required, and public policies merit improvement. It builds on past achievements, aims to prevent slippages in areas where progress has been made, and addresses weaknesses in implementation.

29. To generate broad-based growth and reduce poverty, the PRS focuses on (a) employment generation, (b) nutrition, (c) maternal health, (d) quality o f education, (e) sanitation and safe water, (0 the criminal justice system, and (g) local governance. It acknowledges that progress in these areas requires creating an open and competitive environment conducive to private investment. With 85 percent o f the poor living in rural areas, needful recognition i s given to the rural sector.6 Other priority areas outlined in the PRS are (a) improving the ability o f poor people to participate fully in the growth process through access to better-quality education, health, water, and nutrition; and (b) ensuring that the Government addresses governance issues by, among other things, tackling corruption, enhancing access to justice for the poor, and improving security and public order.’

30. As indicated in the Joint Staff Advisory Note (JSAN),* the PRS vision appropriately builds on the pol icy triangle o f growth, human development, and governance. However, the JSAN also notes that the PRS lacks a wel l thought out process o f growth acceleration, and that despite the focus o n a growth

Roughly three-fourths o f the country’s 140 mi l l i on population lives in rural areas. ’ As the Government’s PRS puts it, “A major th rus t o f the PRS i s o n ensuring good governance because everythmg

* IDA and IMF, 2005, “Joint IDA-IMF Staff Advisory Note on the Poverty Reduction Strategy,” December. else in the nation’s l i fe depends o n it.”

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agenda driven by the private sector, there i s too much reliance on public rather than private investments. Further, a more comprehensive review o f the trade policy regime i s needed. The omission o f a strategic vision for the development o f the financial sector also weakens the pro-poor growth agenda presented in the PRS. While infrastructure i s recognized as an important impediment to growth and poverty reduction, a greater focus i s needed on improving governance in the sector, especially regarding power. The lack o f specificity on sectoral governance reforms, despite the welcome strong focus on governance overall, suggests the need to broaden ownership for governance reforms within the government. Finally, in order to be a credible instrument, future PRSs will require a clearer plan for implementation and monitoring. The authorities have acknowledged these gaps and are seeking to address them as part o f their efforts to update the poverty reduction strategy and i t s implementation.

3 1. The new C T G has expressed full commitment to implementing the PRS. In particular, i t s actions have been targeted at solving core governance problems. It i s also embarlung on a broad set o f major policy and institutional reforms to strengthen economic management.

32. Putting governance at center stage, the Wor ld Bank Group’s most recent CAS’ aligns itself with the Poverty Reduction Strategy. In particular, in the FY06-09 CAS, governance cuts across the two pillars o f the PRS-improving the investment climate and empowering the poor-while addressing the core governance issues common to these two pillars. Under pil lar 1, improving the investment climate, the Bank Group proposes to build on Bangladesh’s strengths by continuing to help maintain macroeconomic stability and accelerating i t s progress toward an open, market-based economy. At the same time, it offers to help the Government address weaknesses in the investment climate by removing policy and institutional constraints to infrastructure provision and improving i t s weak regulatory quality. Under pillar 2, empowering the poor, the Bank Group will continue to build on Bangladesh’s impressive social gains by helping the Government meet the MDGs relating to human development. I t also proposes to help improve the quality and efficiency o f service provision to the poor by strengthening sector governance, and enhancing voice and participation.

33. The CAS notes that progress under both pillars will depend on successful reforms in Bangladesh’s core governance. The Bank Group i s already assisting in strengthening PFM functions through (a) increases in tax and nontax revenues, (b) better use o f public funds, and (c) revitalizing institutions that enhance public sector accountability. The Bank Group will also j o i n the other development partners in helping to strengthen c iv i l society and provide access to information, both o f which are critical if citizens are to ho ld their government to account. This approach o f mainstreaming governance in the Bank Group’s program means that i t s operations, whether in infrastructure, health, education, financial services, or any other sector, will be as much about improving governance as they are about improving sector performance and service delivery.

34. Heeding the sensible advice in the PRS to avoid dissipating resources for governance across too wide a front, the Bank Group i s focusing i t s energies and resources on four key areas: (i) improving PFM, including malung procurement more competitive and transparent; (ii) strengthening tax and revenue efforts; (iii) improving governance and efficiency in infrastructure, especially power; and (iv) supporting local governance and community-driven development initiatives that empower the poor by bringing governments closer to the people or involving beneficiaries in the design and implementation o f programs. The Bank Group i s maintaining a modest level o f policy dialogue and lending engagement across a broader front, enabling it to respond quickly to opportunities for reform that may arise in other areas and to support the work o f i t s development partners.

’ World Bank, 2006, Country Assistance Strategy for the People’s Republic of Bangladesh-FY06-09, Report No. 35193, Washington, DC.

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V. Bangladesh’s Policy and Institutional Reforms Supported by the DSC Series

35. The D S C series” has supported Bangladesh’s reform efforts to (a) strengthen core governance functions, with emphasis on reforms in public procurement, budget formulation and budget execution, tax administration, and public administration; and (b) improve the investment climate, by maintaining macroeconomic stability, deepening domestic deregulation and trade liberalization, and strengthening performance o f the banlung and energy sectors and o f SOEs. A description o f reform efforts-past, ongoing and those needed in the f u t u r e t h a t underpin the country’s development vision follows.

A. Strengthening Core Governance

36. As noted earlier, Bangladesh’s relatively good development outcomes are in sharp contrast to the country’s record of weak governance. As discussed in the Bank’s CAS, resolution to this apparent dichotomy, often viewed as the “Bangladesh paradox,” can be found in the following two factors :

First, there are a few areas of strength in Bangladesh. These include a free and vibrant press and reform orientation at key ministries such as Finance and Commerce and at Bangladesh Bank. These inherent strengths have underpinned many o f the reforms aimed at improving the investment climate, including macro stability, trade liberalization, banking reforms, domestic deregulation, and improvements in disaster management.

Successive governments have played an important part in Bangladesh’s social advancement.’ ‘ For one, and in contrast with many developing countries, they have allowed sufficient space to social organizations to evolve and flourish. Moreover, governments have often successfully forged partnerships with social organizations and the private sector to deliver essential social services in areas where public sector capacity i s lacking (such as primary and secondary education, family planning, primary healthcare, and micro-credit). h o r i t y has also been given to allocating enough budgetary resources to the social sectors.

Another important factor behind the development achievements of Bangladesh is the excellent work of its indigenous community-based organizations. Among the most noted ones are the Grameen Bank, which won the 2006 Nobel Peace h z e together with i t s founder Dr. Md. Yunus, and the Bangladesh Rural Advancement Committee (BRAC).

37. Reconciling Bangladesh’s good development outcomes and weak governance records i s useful as it emphasizes country specificity. I t does not, however, detract f i o m the fact that many governance- related areas are extremely weak in Bangladesh, and, unless adequately addressed, risk jeopardizing the sustainability of the development outcomes. Of particular concern are shortfalls in the core governance functions related to the nature o f political competition, the quality o f P F M and accountability mechanisms that provide an effective check o n executive power. These shortfalls have been f i r ther confirmed by the events o f the past several months, which l ed to the imposition o f a state o f emergency and postponement o f the January 22 parliamentary elections. Recognizing these challenges, the CTG has initiated reform efforts to increase transparency and accountability in decision making process and reducing systemic opportunities for corruption.

As part o f the DSC series, three development pol icy credits totaling US$700 m i l l i on have been provided to Bangladesh since 2003; the proposed operation is the fourth in the series. In support o f the country’s re form program, D S C I was approved in June 2003, with a credit amount o f US$300 mil l ion. In recognition o f sustained reform efforts, DSC I1 and D S C 111, each o f US$200 mill ion, were approved in July 2004 and December 2005, respectively. D S C IV is also proposed to be a US$200 m i l l i on operation.

I O

’’ Wor ld Bank, 2005, “IEG Impact Evaluations: Bangladesh Maternal and Child Health,” Washington, DC.

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Strengthening and Modernizing Revenue Administration

38. Government revenues from tax and nontax sources are extreme& low in Bangladesh compared to other countries in South Asia and elsewhere (Table 2). L o w revenue severely restricts the Government’s ability to provide public goods and services. The major shortcomings in the tax system include (a) a heavy dependence on import taxes (45 percent o f total tax collections); (b) numerous exemptions, tax holidays, and preferences; and (c) a poorly functioning tax administration. The tax administration problems are reflected in poor taxpayer services, lack o f transparency in collection, inadequate audit and enforcement, and protracted taxpayer disputes, a l l o f which have hampered revenue collection. The National Board o f Revenue (NBR) also suffers f rom ineffective human resource (HR) policies and lacks authority and autonomy to tackle them. Modernization o f the NBR and closing the loopholes in the tax policy are a priority area for the Government.”

Table 2: Tax and Nontax Revenues (as percent o f GDP) FY99 N O 0 F Y O l FY02 FY03 FY04 FY05

Bangladesh Tax Revenue 7.2 6.7 7.6 7.7 8.3 8.2 8.5 Nontax Revenue 1.8 1.7 1.4 2.4 2.0 1.9 2.0 Total Revenue 9.0 8.4 9.0 10.1 10.3 10.2 10.6

Tax revenues of comparator countries India 12.0 12.0 11.4 12.0 12.1 12.7 d a Pakistan 15.8 16.0 15.1 18.2 16.6 15 13.5 Sr i Lanka 18.9 17.6 17.4 17.3 16.4 16.4 d a Thailand 16.0 16.0 17.5 d a 19.6 19.6 d a Source: World Development Indicators, NBR, and M in i s t v of Finance and Planning, Bangladesh

39. GOB has developed a comprehensive tax administration modernization program, which the Bank, the United Kingdom’s Department for International Development (DFID), and the IMF have actively s~ppor ted. ’~ K e y reform measures under this program include the following:

Adoption o f an NBR Strategic Development Plan aimed at raising revenues through organizational improvements, automation, enhanced voluntary compliance, and strengthened monitoring.

Reorganization o f the NBR along functional lines (as opposed to the current tax-by-tax organization). In an important f i rs t step toward this, key cross-cutting functions such as HR, information and communications technology (ICT), and audit for VAT and Income Tax were placed under existing NBR Board members in FY07.

Establishment o f L T U s for VAT and income tax. Organized along functional lines, the LTUs are focused on full automation, universal self-assessment, and strengthened audit.

Introduction o f a Central Intelligence Cel l and an Audit Cell within the NBR.

Phased radical improvements in VAT and income tax laws.

Tax pol icy reforms are being supported by the IMF, in sync with the tax administration reforms that the Bank and DFID are supporting. An IDA grant o f $4 m i l l i on has been placed with NBR under the Economic Management Technical Assistance Program (EMTAP) project.

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0 Ongoing implementation o f an integrated I C T development program for a l l three wings o f the NBR, along with business process changes consistent with comprehensive automation o f NBR operations.

40. Overall, progress on tax reforms has been slower and more uneven than envisaged, resulting in the weak revenue mobilization response. Tax administration reforms that have been implemented are expected to have long gestation before tangibly impacting revenue mobilization. Moreover, progress o n tackling tax policy loopholes and improving customs administration (especially o n the HR side) has been lacking. Tax reforms, therefore, will require closer and more sustained attention o f policy makers for quite some time to come.

Strengthening Expenditure Management and Upgrading Financial Management Systems

41. Bangladesh is making progress in improving the quality of its PFM functions, notably by maintaining aggregate fiscal discipline, improving institutions for revenue (discussed above) and expenditure management and strengthening key institutions o f financial accountability, such as the Comptroller and Auditor General (C&AG) and the Public Accounts Committee (PAC).

42. Bangladesh has a good record of maintaining fiscal balances and broadly allocating expenditures to priority sectors such as education, health, infrastructure, and rural development (Table 3). T h i s has been complemented by credible efforts to contain unproductive expenditure-for instance, the continuance o f the selective freeze on the hiring o f lower-class (Class I11 and IV) employees. Nonetheless, weak revenue mobilization and severe capacity constraints have kept spending o n the priority sectors at relatively l o w levels.

Table 3: Total Expenditure by FunctiodMinistry' (percentage o f GDP)

Ministrymivision FY98 FY99 FYOO FYOl FY02 FY03 FY04 FY05 FY06 FY07 (B)

Interest 1.2 1.3 1.5 1.6 1.7 1.9 1.8 1.8 1.8 1.6 Generalpublic Services 1.4 1.2 1.3 1.5 1.4 1.5 1.5 1.6 1.3 1.8 Defense and Public 2.0 2.0 2.1 2.1 1.9 1.8 1.9 1.9 1.9 1.8 Order and Safety Education 2.1 2.1 2.2 2.3 2.2 2.2 2.0 1.9 2.2 2.3 Health 1.0 0.9 1.0 1.0 1.0 0.9 1.0 0.9 1.0 1.0 Social Security and 0.8 1.0 1.0 0.8 0.6 0.6 0.6 0.7 0.7 0.7 Welfare Agriculture and Rural 1.2 1.3 1.3 1.3 1.0 0.9 2.2 2.7 2.6 2.6 Development Fuel and Energy 0.9 0.9 1.1 1.0 0.9 1.0 1.2 1.2 0.9 0.9 Transport and 1.4 1.5 1.5 1.8 1.9 1.8 1.7 1.8 1.5 1.6 Communication Housing and 1.1 1.3 1.6 1.6 1.4 1.3 0.2 0.2 0.2 0.1 Community Services

Total Expenditure 13.4 14.1 15.0 15.5 14.4 14.3 14.5 15.0 14.5 15.0 * Expenditures for FY98 through FY06 are as per the revised budget. Actual expenditure data are not available. Note: Discrepancy with total due to a number o f s m a l l items. B= budgeted Source: Ministry of Finance and Planning

43. The Government has strengthened strategic budget planning by expanding the medium-term budget framework (MTBF) approach. The MTBF approach has been introduced on a pi lot basis in ten

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ministries (6 in FY06 and 4 in FY07), and there are plans to cover another four ministries in the FY08 budget. T h i s will bring MTBF coverage to more than 65 percent o f total budgetary expenditure. The emphasis at this init ial stage has been on better integration o f the revenue (recurrent) and development (investment) budget planning processes at the center and l ine ministries, by unifylng the budget preparation process and issuing an integrated budget ceiling for l ine ministries. The MTBF approach has also given more flexibil i ty to the line ministries in their spending allocation decisions, and has encouraged the substantive involvement o f senior officials in the budget formulation process, which otherwise was considered routine work and typically undertaken by lower-level officials. Despite such progress, the process i s s t i l l in i t s infancy, and needs to be significantly deepened before it can produce tangible gains in linking policies and budgets and contribute to better budget and service delivery outcomes.

44. To strengthen budget execution, serious efforts are being made to improve the accuracy and timelines of expenditure and public debt information, notably by computerizing accounting transactions. GOB has rol led out a transaction accounting system to 60 district accounts offices and 49 chief accounts offices. This has considerably increased the speed with which accounts are generated and allowed production o f monthly fiscal reports for each ministry. Adoption o f a new law o n public procurement in July 2006 has strengthened the legal and regulatory framework of public expenditure management. In early FY07, the Ministry o f Finance and Planning issued a circular notifying the Government’s decision to adopt the International Public Sector Accounting Standards (PSAS) cash standards for accounting. Several government agencies have started implementing this circular, with help f rom the C&AG. In addition, a Resource and Debt Management Wing was established in the Finance Divis ion o f the Ministry o f Finance and Planning in 2004 to put together a comprehensive database covering both domestic and external debt and provide analytical inputs on debt pol icy for annual budget preparation. The unit, now fully staffed, has made good progress in developing the debt database and helping update the MTBF for the FY08 budget.

45. A number of measures have sought to strengthen internal and external accountability, audit and scrutiny. T o strengthen the internal audit function, the Government has prepared a Public Expenditure Management Manual and the Internal Control Manual, and taken steps consistent with the manuals, including separation o f cash management f rom debt management. The time lag for f inal audited accounts has been reduced from two to one year. The C&AG has introduced performance and entity based audits o n a pi lot basis and i s planning to ro l l them out across various government units. Audit committees are being formed in ministries, and GOB remains committed to malung the C&AG functionally and administratively independent.

46. Reform efforts have also sought to strengthen the transparency of fiscal information and key institutions of accountability in PFM. To this end, GOB developed baseline ratings o f the core PFM functions in early 2006 and more recently prepared a comprehensive, medium-term, rol l ing Public Financial Management Improvement Plan (PFMIP) that lays out a series o f second-generation PFM reforms. Among the init ial implementation measures, the FY07 Budget Summary, for the f i rs t time, included an explanatory note that listed al l explicit and counter guarantees provided by the Government against liabilities o f SOEs; these amounted to US$2.5 b i l l ion (4 percent o f GDP). Furthermore, in FY07, GOB began setting up a technical support unit for the P A C in the Legislature and developing a system o f information that would increase the transparency o f i t s decision malung, once the elected Parliament returns. The PAC, reestablished with IDA support under D S C 11, had made good progress in reducing the backlog o f audited accounts for discussion, and i ts deliberations were beginning to be followed by the press in Dhaka, until the Parliament was dissolved at the expiration o f the last elected government’s term.

47. Notwithstanding these gains on strengthening the PFM system and institutions, the reform agenda is far from over. Accounting and reporting mechanism are not fully aligned with the MTBF framework. The computerized accounting system currently deals with recording transactions rather than

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providing management with useful information on budget and actual expenditure. The accounting information i s not available in the ministries due to lack o f clarity o n which agency within the ministries i s responsible for the function. External audits are excessively detailed and focus on financial transactions only. The key challenge for the Government i s to design a single umbrella P F M program and monitor progress towards reforms, with necessary support f rom the key development partners. The mentioned PFMIP in particular provides an opportunity for the development partners to harmonize their development assistance.

48. Bangladesh has made steady progress in improving the transparency and competitiveness in public procurement-an area typically rife with corruption. Despite strong resistance from powerful vested interests, the Parliament adopted a new law on public procurement in July 2006, with many provisions that are in line with well-accepted international practices. GOB i s now finalizing the rules to implement the law, and in the interim i s using the regulations that were the precursor for the law. The regulations have introduced new standard bidding documents that significantly reduce the layers in the procurement approval processes. The Government has also put into place a unique procurement performance tracking and monitoring system, which i s being piloted in a few agencies. T h i s progress has enabled Bangladesh to secure B ratings in three o f the four PFM indicators on procurement.

49. while these reform have laid the foundations for a more effective publicprocurement system, a number of cross-cutting concerns remain. These issues relate to inadequate enforcement o f regulations, delays in award, allegations o f fraud and corruption, and political interference. In order to further strengthen the system, GOB i s preparing a second procurement reform project, t o be funded by IDA, with proposed interventions in institutionalizing procurement capacity development, strengthening implementation and monitoring at the sectoral level, piloting e-government procurement (e-GP) to increase transparency and competition, and engaging the business bodies and c iv i l society in the monitoring o f the contracting process and procurement outcomes.

50. The Government has also taken some initial steps in FY07 to strengthen sub-national governance. W h i l e public administration and governance remain highly centralized in Bangladesh, the Government has begun to increase the fiscal discretion available to the lowest tier o f rural local government, the Union Parishad, through introducing an untied block grant. More recently, the Local Governance Support Project, financed by the IDA, has begun to streamline and expand the block grant as the foundation o f an emerging fiscal fkamework for local governance

Toward a M o r e Responsive and Efficient Public Administration

5 1. Concerns about the unsatisfactory performance of the civil service are being addressed by a number of recent public administration reforms. The quality problem begins at the entry level, with recruitment into the Bangladesh Civil Service (BCS) being partly based on nonmerit considerations such as regional and other quotas. Whi le on paper the Bangladesh Public Service Commission (BPSC) i s an independent institution, in practice this has not been the case, which further affects quality. Modest reforms are being initiated to address the situation. A large number o f Class I officers have been promoted to Deputy Secretary and higher levels under the revised Promotion Rules (2002), which mandates more emphasis on merit in promotion decisions, helping improve staff motivation at the senior 1 e ~ e l s . l ~ An improved training pol icy was adopted in 2003, and a Career Planning and Training Wing was created in the Ministry o f Establishment for planning and implementing the training policy. Completion o f training in some essential courses has been made a requirement for promotion. Still, considerable scope remains for improving the content and relevance o f the training courses. As part o f the effort to

l4 A gazette notification issued in early December 2006 announced the promotion o f 361 c i v i l servants to various ranks, ranging fiom Deputy Secretary to Secretary.

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address this, training o f mid-level officers i s being supported under the DFID-funded Management at the Top Training (MATT) project. The BPSC recently prepared a project proposal to support institutional strengthening, and has sought technical assistance from the Bank. The project envisages systemic improvements in the BCS examination system and HR development. In addition, the Ministry o f Establishment has prepared a project proposal for strengthening foreign training and has approached the Bank for support through technical assistance.

52. Implementation o f across-the-board salary increases in line with the recommendations o f the most recent Pay Commission (2006) has helped offset a small part o f the real decline in officer-class cash compensation since independence. However, the more vexing and pertinent issue o f moving away from cash wage compression (between higher and lower-level staff) s t i l l remains. Compensation o f the higher- level s ta f f needs to be adjusted to more competitive levels to address incentives issues and promote probity among the staff. In addition to the existing provisions o f the 1979 Government Servants (Conduct) Rules, the introduction of legal requirements for mandatory submission by c iv i l servants o f income tax returns and statements o f assets and liabilities has been a step toward providing a basis for improving transparency and accountability o f government officials. Nevertheless, implementation o f the new regulatory framework and i t s effectiveness need to be evaluated. Compliance and enforcement remain the main challenges.

Streamlining and Reducing Scope for Discretion in the Regulatory Environment

53. and reduce the scope for corruption arising from it. Specifically:

A number of measures have been initiated to streamline the domestic regulatory environment

Customs and port clearance. A noteworthy step has been the introduction o f the Automated System for CUstoms Data (ASYCUDA++), involving electronic processing and clearance o f cargo. A one-stop service for clearing RMG export cargo was introduced at the Chittagong port to facilitate port and customs related paperwork, shortening the time taken for clearing exports and also improving the turn-around time for ships. Handling and operation o f the Chittagong Container terminal was handed over to a private operator in FY07 by the CTG, which i s expected to improve efficiency and lower cost.

Investment facilitation. The e-government processes implemented by the Board o f Investment and the Bangladesh Export Processing Zones Authority (BEPZA) have helped streamline the business registration process and other investor services. Further progress i s expected from automation at the Registrar o f Joint Stock Companies, work o n which has already started with support f rom IFC’s South Asia Enterprise Development Facil ity (SEDF) and the Australian Government’s overseas aid program, AusAid.

Land registration. A Land Registration Ac t came into force f rom July 1, 2005. The new act makes registration mandatory for a l l transfers o f immovable property, bequeaths, mortgage deeds, distribution deeds o f inherited property and contracts for sale. T h i s will help reduce the scope for false and multiple registration o f land. A pi lot project t o computerize land records has been initiated in the Demra thana o f Dhaka district. T h i s project aims at simplifying the title deed requirements by putting the title, the location o f the land, and a map on a single page with a l l other documents in a back-up data base. The pi lot project follows the completion o f the survey o f greater Dhaka by the Land Department.

Utilitv regulation. The Bangladesh Telecom Regulatory Commission (BTRC) has been set up, leading to rapid growth in the private telephone sector. Titas Gas Transmission & Distribution Company, the largest natural gas marketing company in the country, began a program in M a y 2006 to use e-governance in i t s processes. T h i s program will substantially reduce the

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bureaucratic burden on customers seeking new connections and enhance transparency and accountability in the billing system.

Microcredit regulation. A Micro-credit Regulatory Authority Ac t was adopted in 2006. The Ac t places al l microcredit institutions under a Micro-Credit Regulatory Authority for more effective governance and supervision o f the sector.

Bangladesh Investment Climate Facil ity (BICF). BICF i s a new US$55 mi l l ion investment climate reform facility, funded by the European Union and managed by the IFC, with the Government as a key partner. The facility will provide technical assistance and advisory services to government and nongovernmental entities. T h e BICF has three major objectives: (i) improving the quality o f overall business regulations; (ii) improving the regulatory framework for private participation and environmental and social compliance practices in economic zones; and (iii) strengthening institutional and c iv i l service capacity to promote private sector development reforms.

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Establishing and Operationalizing an Independent Anti-Corruption Commission (ACC)

54. An Anti-Corruption Commission Act was passed by the Parliament in February 2004, establishing the Commission and providing it a mandate to prevent corrupt practices by public officials and investigate specific offenses. The operationalization o f the ACC has proven more intractable, however. Three Commissioners, including the Chairman, were selected for the A C C in November 2004, but were provided limited init ial staff and resources to begin operations. In addition, the A C C has had weak polit ical support. Renewed efforts are being made to revive the ACC. In particular, the C T G recently replaced the Chairman and the two other Commissioners because o f poor performance. An interim organogram o f the A C C and rules relating to recruitment and prosecution have been approved by the Government. Reconstituted and energized, the A C C i s now vigorously pursuing i t s mandate by initiating quick actions against high-profile suspects.

Reforming the Civil Justice System

55. The recent measures by the CTG to separate the judiciary f rom the executive herald a major and long-pending push toward an independent and functioning judiciary. The Government has also acknowledged the weak capacity o f the Attorney General’s office to carry out prosecutions. A new Attorney General has been appointed, and panels o f senior lawyers f rom the private bar will be formed in order to carry out prosecutions. Amendments to the Civil Procedure Code adopted in 2003, introducing mediation and the imposition o f heavy costs orders on parties seelung more than three adjournments, have helped reduce the number o f cases going to trial and case processing times. In several p i lot districts, court administration has been strengthened through case management reforms, automation and upgrading o f facilities. The post o f one Judicial Administrative Officer (JAO) has been created for each pi lot district. The JAO will be in charge o f the Central Filing Office and will distribute the cases among judges: the reform will help improve the efficiency o f the courts.

Training o f the subordinate judiciary has been ongoing.

B. Strengthening the Investment Climate

5 6. An array of structural policy and institutional reforms-relating to macro stability, trade liberalization, domestic market deregulation, and banking sector reforms-have underpinned the good growth performance thus far. Authorities recognize the need now for deeper and more complex reforms in order to sustain and further accelerate growth: in particular, by deepening trade liberalization and financial sector development; improving provision o f infrastructure (especially power, ports, and transportation); strengthening the regulatory environment; and improving agriculture sector performance.

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In addition, continued emphasis on macroeconomic stability remains essential. The DSC series has supported a number o f reforms in these areas.

Ensuring Continued Macroeconomic Stability

57. Macroeconomic stability, characterized by l o w and stable inflation, sustainable fiscal and external balances, and sound public expenditure allocations, remains essential to achieving GOB’S ambitious growth objectives. The recently updated macroeconomic framework, agreed between the authorities and IMF under the PRGF program, reflects the Government’s continued commitment to macroeconomic stability and sustainability. DSC IV, as in the case o f the previous DSCs, would support the implementation o f this medium-term macroeconomic framework.

Main Features of the Government S Macroeconomic Framework (summarized in Table 1)

58. GOB’S medium-term fiscal strategy aims to boost revenue mobilization while continuing to direct expenditure towards the social sectors. The budget deficit i s projected to be contained at around 3.5 percent o f GDP, except in FY08 when the ratio would reach 5.2 percent under the assumption that BPC’s liabilities o f 1.6 percent o f GDP will be covered by the budget. The ratio o f revenue to GDP is projected to rise f rom an estimated 10.6 percent in FY06 to 11.0 percent in FY09, as benefits o f tax administration modernization measures (para 39) begin to k i ck in. It would be important, however, to also expand the tax base and simplify the tax system. In particular, removal o f the income tax holidays and VAT exemptions-identified in a recent GOB sponsored s tudy-can yield extra revenues o f about 2 percent o f GDP. The expenditure-GDP ratio i s envisaged to increase from an estimated 13.8 percent in FY06 to 14.3 percent in FY09. The efficiency o f ADP spending i s expected to improve, benefiting f rom recent reform measures mentioned in para 43.

59. Bangladesh Bank intends to maintain its policy of gradual monetary tightening to correct the overshooting of some of its monetaryprogram targets last year and avoid overheating of the economy. In particular, authorities aim to keep reserve money growth close to the nominal GDP growth rate and decelerate private credit growth to under 15 percent a year. Bangladesh Bank i s also committed to relying on market-based mechanisms to counter disorderly conditions in the foreign exchange market, continuing with i t s flexible exchange rate policy while gradually building up the foreign exchange reserve cover. The monetary program agreed under the IMF-supported PRGF should al low authorities to meet their inflation and international reserve objectives.

60. Bangladesh’s risk of external debt distress is “low” and risk of total public debt distress is “moderate,” as concluded by the recent joint World Bank-IMF Debt Sustainability Analysis. The analysis assumes a macroeconomic policy framework that i s broadly consistent with the one adopted by authorities under the IMF-supported PRGF program. Bangladesh’s external debt burden indicators are fairly benign, with the ratio o f external debt to GDP at around 30 percent (mostly concessional) and the debt servicing ratio o f only 5 percent. The external debt indicators do not breach the relevant policy- dependent thresholds under various scenarios. However, risks to domestic revenue mobilization and domestic debt accumulation, particularly contingent liabilities, raise some concerns about public debt. Efforts to ensure that the domestic revenues targets are met and increasing energy prices to their full cost recovery levels would be key to ensuring continued sustainability o f public debt.

Progress on Trade and Exchange Liberalization

61. Afler several years of reform hiatus, steady progress has been made on trade liberalization since 2002. Over the period FY02-07, the average customs duty has been lowered from 21.0 to 14.9 percent, the top customs duty rate f rom 37.5 to 25 percent, and the number o f nonzero customs duties f rom four to three. T h i s progress, however, was partly offset by an increase in the use o f other protective

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tariffs (para-tariffs), which now account for about 40 percent o f total protection, compared to only 12 percent in the mid-1990s.I5 Even so, the total nominal protection fe l l f rom 29.4 percent in FY02 to 26.5 in FY06, and further to 24.3 percent in FY07. The reduction in nominal protection was accompanied by a 90 percent cut in the number o f QRs, including virtual elimination o f trade-related QRs in the FY06 budget.16 Removal o f longstanding ban on a wide range o f textile imports in the FY06 budget was particularly significant. In addition, authorities further liberalized the exchange regime by free floating the Taka/US$ rate in M a y 2003. Benefiting f rom these liberalization measures, the ratio o f trade to GDP increased from 28 percent in FYOO to 38 percent in FY06.

62. Notwithstanding this progress, the remaining trade liberalizing agenda remains substantial. Despite the declining trend, average nominal protection in Bangladesh i s the highest in the region and among the highest in the world. This, together with cumbersome trade facilitation procedures, an inefficient duty drawback system, and severe infrastructure bottlenecks at the port, has resulted in the anti-export bias leveling o f f at relatively high levels since the late 1990s. T h i s works against the emergence o f new export activities and expansion o f the export activities to non-enclave areas. Bangladesh’s export orientation compares unfavorably with other Asian economies, and i t s export base i s heavily concentrated in the garments sector-RMG exports account for about 75 percent o f merchandise exports-where the extent o f the anti-export bias i s much lower.

63. I n order to diversify its trade base and improve export competitiveness in general, a well thought out sequence of trade liberalization measures needs to be developed. K e y elements o f the reform strategy to further liberalize the trade regime include:

0 A continued emphasis on unilateral trade liberalization and a somewhat cautious approach to the current fashion o f regional and bilateral trade agreements.

Establishment o f a l o w and uniform tar i f f rate in the near future.

Merger o f para-tariffs with the customs duty, in order to have one tariff rate for each tar i f f line.

Elimination o f a l l end-user tariff exemptions and concessional tariffs.

Discontinuation o f the protective use o f VAT and Special Duties by ensuring that they are levied both on domestic production and imports o f the same product.

Ensuring a well-functioning duty drawback system such that rebates are paid quickly.

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Improving Financial Sector Accountability, Transparency, and Performance

64. Bangladesh has embarked on bold banking reforms since 2001. K e y actions include strengthening competitive pressure on the NCBs, loosening government control, and tightening prudential regulations and regulatory quality. GOB i s restructuring the sickly NCBs and preparing three o f them for divestment: i t favors keeping control o f one (Sonali Bank), since it handles i t s treasury functions. One o f the NCBs, Rupali Bank, i s on the verge o f being sold to a strategic investor. Successful completion o f the sale will mark a major milestone in the banking sector reform process and will set a powerful precedent for dealing with the other NCBs. Agrani Bank and Janata Bank, two other NCBs, are scheduled to be privatized in the coming years. GOB’S decision to keep majority control in Sonali Bank would deprive the bank o f the potential efficiency gains f rom private ownership and may benefit f rom reevaluation. Efforts to restructure the three NCBs other than Rupali Bank received a major boost by the CTG’s recent

l5 Four kinds o f para-tariffs have been put to use: the Infrastructure Development Surcharge, Regulatory Duty, VAT,

l6 Three trade-related QRs r e m a i n - o n poultry, eggs, and s a l t - o n which GOB has received waivers until 2009 f rom and Supplementary Duty. The Regulatory Duty, introduced in FYOI, was later removed in FY05.

WTO under Art icle XVIII.

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decision to corporatize them, to enhance their operational autonomy and accountability and, for the f i rs t time, to bring them directly under Bangladesh Bank’s supervisory and regulatory control. GOB has expressed i t s commitment to completing the remaining steps in the corporatization process. The Memorandum o f Understanding (MOUs) signed between Bangladesh Bank and the NCBs remain effective, capping new lending by each NCB, restricting single borrower exposure, and setting monitorable targets o n cash recoveries and cost reductions.

65. enforce them more strictly. K e y measures include:

Bangladesh Bank has continued to align its prudential norms with international standards and

0 Increase in the minimum risk-weighted capital adequacy requirements for banks f rom 8 percent t o 9 percent and in the minimum capital requirements f rom Tk 400 mi l l ion (US$6 million) to Tk 1 b i l l ion (USSl5 million).

Tightening o f loan classification, rescheduling, and provisioning rules.

Introduction o f loan write-off guidelines.

Creation o f an early warning system.

Issuance o f risk management guidelines in the areas o f credit, foreign exchange, asset-liability management, internal control, and anti-money laundering.

Introduction o f measures to improve corporate governance, including limiting: the number o f board members in a financial institution to a maximum o f 13; the tenure o f a director to six years; shareholding by a single shareholder to 10 percent o f capital; and the number o f shareholding family members on the board to one. Furthermore, these measures require banks to establish audit committees, impose limitations o n divided payouts by a financial institution and even limit expenditures for automobiles and travel expenses for executives.

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66. The banking sector overall has responded well to the reform measures. Responses o f private commercial banks (PCBs) and foreign commercial banks (FCBs) have been especially positive. These have turned around their operational and financial performances and increased their combined market share to over one-halc while the market share o f the NCBs fel l f rom 54 percent in 1998 to 37 percent in 2005. Similar trends are seen for bank deposits and loans: with PCBs and FCBs gaining market share at the expense o f the NCBs and development financial institutions (DFIs). Furthermore, the nonperforming loan (NPL) ratios in public and private banks have declined markedly since 2001, and capital adequacy ratios exceed the 9 percent mark for the PCBs, FCBs, and DFIs although not the NCBs (Table 4). Nonetheless, NPLs o f the NCBs remain precariously high and provisioning and capital shortfalls are significant.

Table 4: Key Performance Measures in the Banking Sector

BankType 2000 2001 2002 2003 2004 2005 2000 2001 2002 2003 2004 2005

DFIs 3.2 3.9 6.9 7.7 9.1 9.2 62.6 61.8 56.2 47.4 42.9 34.9 PCBs 10.9 9.9 9.7 10.5 10.3 9.2 22 17 16.4 12.4 8.5 5.6 FCBs 18.4 16.8 21.4 22.9 24.2 25.1 3.4 3.3 2.6 2.7 1.5 1.3 Total 6.7 6.7 7.5 8.4 8.7 7.3 34.9 31.5 28.0 22.1 17.6 13.5 Source: Bangladesh Bank Quarterly, April - June 2006. Note: NPL numbers are without adjustment for actual provision and interest suspense. * Negative CAR for NCBs in 2005 because o f negative capital o f Agrani bank.

Capital-to-risk weighted assets ratio Ratio o f gross NPL to total loans

NCBs 4.4 4.2 4.1 4.3 4.1 -0.4* 38.6 37 33.7 29 25.3 21.3

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67. Progress has been slow in a number of restructuring areas and major challenges remain. In particular, some o f the key restructuring measures-branch closures, s ta f f rationalization, improved mechanisms for credit allocations, stronger management and boards-are s t i l l pending. Furthermore, while lending to the private sector has stayed within the l imi ts specified by the MOUs signed with Bangladesh Bank, state-directed lending to loss-malung SOEs (not covered under the MOUs), especially BPC, has shot up. Together with slow recovery f rom the largest defaulters and insufficient progress (relative to the MOU targets) o n cost reductions, this has undermined authorities’ efforts to significantly improve the NCBs’ financial situation, before divesting them. T o p ick up pace, Sonali and Janata banks need to expedite implementation o f the remaining restructuring measures, malung better use o f the services o f the advisory teams,” and GOB needs to provide more operational autonomy to the NCBs, especially in HR matters. In addition, a mechanism needs to be developed at the NCBs to monitor their performance, and the terms o f reference for the senior managers o f the NCBs need to modified to make the managers more directly accountable for the banks’ performance.

Addressing Infrastructure Constraints: Emphasis on the Energy Sector

Power Sector Reforms

68. Progress has been slow in tackling the increasingly binding infrastructure constraints. The most severe constraints are in energy, particularly the power sector. Banngladesh today i s in the gnps o f a power crisis, with weaknesses in service provision, finances, and generation, each contributing to the situation. . Service Provision. There i s a major shortfall in supply relative to demand for electricity. The

installed capacity o f electric power in the country i s about 5,350 MW, including 1,260 MW that i s privately owned and operated. However, largely because o f unreliable state-owned power plants, it has been diff icult to generate more than 3,700 MW at any given time. Meanwhile, peak demand i s estimated to be about 5,000 MW. The country i s l ikely to see daily load shedding o f 1,200 to 1,500 MW in the coming summer months.

Financial. The Bangladesh Power Development Board (BPDB) i s in the midst o f a significant cash crunch. I t s weighted average cost o f supply from own generation and IPPs, i s about Tk 2.5 per kWh. Even after the recently implemented tariff increase BPDB’s bulk tariff rate’is Tk 2.1, and it will s t i l l lose, heavily, on each bulk sale unit. Losses in BPDB’s bulk supply business have been running at about Tk 12 b i l l ion per year; the recent tar i f f increase i s l ikely to reduce this loss by about Tk 3.5 b i l l ion over the course o f an entire year.

Generation. Bangladesh has underinvested in generation and transmission, while expanding i t s distribution network in rural areas. N o new private sector generation capacity has been added over the last 5 years, in large part because o f the opaque unsolicited tenders initiated by GOB to procure large power plants. Whi le the number o f customers has increased sharply-estimated at over 10 mi l l ion countrywide, for a household connection rate o f about 38 percent-the shortage o f generation i s n o w so severe that a moratorium has been placed on new lines in rural areas. T o improve access in remote rural areas, the Government has embarked o n a renewable energy project, supported by the Bank’s Rural Electricity and Renewable. Energy Development project, through which i t has connected more than 100,000 consumers using solar home systems, with 4,000 new consumers being added each month.

.

.

69. As part o f the slow-moving reform process, power prices were raised in March 2007, partially in line with the pricing framework adopted by GOB in September 2003. In other recent measures, GOB has

” Agrani Bank has moved relatively faster, allowing i t turn-around an operating loss o f Tk 20 bi l l ion in 2004 into an operating profit o f Tk 2.1 bi l l ion in 2005 and Tk 1.8 bi l l ion during the f i r s t six months o f 2006.

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further reduced arrears of the power utilities, adopted a Captive Power Policy, adopted in principle a timebound financial restructuring plan for the power sector, and recruited a reputable international transaction adviser to boost the chances o f attracting private invesment for a new baseload power plant.

70. The power utilities have improved operating efficiency and reduced arrears in recent years, although the effort needs to be sustained and accelerated. As seen in Table 5, system losses have fallen and collection efficiency has improved to 99 percent, resulting in an improvement in the ratio o f collection to generation, f rom 66.5 percent in FYOl to 74 percent in FY06. Arrears to major power utilities have been reduced, f rom an equivalent o f 9.2 months in June 2001 to 3.8 months in June 2006. T h i s reflects a major drive by the Government to ensure that ministries pay their electricity bills, coupled with more aggressive efforts by the utilities to collect f rom private customers. GOB has been less successful in recovering arrears f rom the semi-autonomous public ent i t ies-c i ty corporations, municipalities, the Ministry o f Disaster Management and various government-owned jute and textile corporations. Recently the Finance Division has made special arrangements for recovering arrears f rom the semi-autonomous entities. It has made provision for Tk 4.5 b i l l ion for power utilities to clear their outstanding bills up to December 2006, in addition to withholding block grants f rom some semi- autonomous entities that had accumulated large arrears.

Table 5: Bangladesh Power Sector Performance Indicators b, F Y 9 9 F Y O O N O 1 FY 02 F Y 0 3 FY04 F Y 0 5 FYO6

System Loss 30.3% 29.0% 28.4% 28.1% 25.4% 23.6% 23.2% 25.0% Collection Eficiency 84.3% 90.6% 93.0% 97.8% 97.2% 98.6% 98.4% 99.1% Collection Generation Ratio 58.8% 64.3% 66.5% 70.3% 72.5% 75.4% 75.5% 74.3% . Profit (Loss) in Tk Bil l ion

BPDB (3.74) (5.19) (4.63) (4.34) 1.75 (2.14) (5.79) (7.82) DESA (2.11) (2.31) (3.69) (4.59) (2.6) (1.72) (0.80) .. REB 0.23 (0.02) 0.14 0.57 0.62 0.75 1.18 0.76 DESCO 0.34 0.54 0.65

Arrears (Tk Billion) 20.72 23.74 26.23 28.26 30.05 30.06 33.65 33.50 Arrear(Months equivalent) 9.34 9.48 9.16 8.86 8.07 6.95 4.03 3.88

Source: GOB. BPDB = Bangladesh Power Development Board; D E S A = Dhaka Electric Supply Authority; DESCO = Dhaka Electric Supply Company Ltd; REB = Rural Electrif ication Board

71. power sector, although the pace of reforms has been uneven and slow. K e y measures have included:

The Government is also beginning to address some of the major structural constraints in the

0 Establishment o f BERC in 2004 under a new E n e r w Regulatory Commission A c t 2003. Once fully operational, BERC i s expected to play the lead role in setting tariffs, issuing licenses, and providing regulatory oversight.

Restructuring. o f the power sector: T h e industry structure has changed noticeably since the late 1 9 9 0 ~ ~ leaving B P D B with about 60 percent o f generation (compared to 86 percent in FY99) and just 22 percent o f distribution. Major restructuring steps have included:

horizontal unbundling o f BPDB’s distribution activities into four regional entities: one each for the West Zone, Northwest Zone, South Zone, and Central Zone; creation o f the Dhaka Electric Supply Company Ltd (DESCO) out o f DESA assets to cover parts o f the key Dhaka market; creation o f the Dhaka Power Distribution Company as a corporatize entity to take over the distribution operations o f DESA

o

o

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72.

o

o

creation o f the Power Grid Company o f Bangladesh (PGCB) to handle al l o f BPDB’s transmission assets; transfer o f more than 9,000 lulometers o f distribution lines f rom BPDB to the more- efficient Rural Electrification Board (REB) between FY03-06. The 70 rural electric cooperatives under the REB now handle distribution in most rural areas, and, with prudent investments, accountable management, and better incentive structures have improved the operational efficiency o f their business.

Corporatization o f some power utilities. Three distribution companies-DESCO, West Zone, Northwest Zone-have been corporatized. Corporatization o f the remaining three-DESA, South Zone, and Central Zone-is planned over the course o f the next three years.

Adoption o f guidelines in FY07 to procure power f rom captive power plants. The objective i s to tap potential captive capacity into the public grid.

Onnoinn work to prepare a financial recovery and restructuring (FRP). Based o n technical work by international consultants, GOB adopted in principle the FRP, which it has shared with IDA. Debt restructuring, a key proposal under the FRP, would not only make the sector more appealing for private investors, i t would also allow a more gradual adjustment o f tariffs-something o f considerable political appeal.

Recruitment o f reputable international transaction advisers. To overcome the major governance problems in generation financing and procurement, recent recruitment o f the international transaction advisor for a new IPP plant i s a positive move. T h i s will not only help ensure a transparent procurement process but also will spotlight broader sector governance and financial issues, environmental and social impact aspects, and public-private r isk allocation factors. Furthermore, the financing structure developed for this IPP plant would provide a key input to the Generation Financing Plan. GOB has also requested the Asian Development Bank (ADB) to support the recruitment o f reputable transaction advisers to support procurement o f other IPPs that are being considered under i t s least-cost generation expansion plan.

Recent government-commissioned studies indicate that Bangladesh would need at least one utility-scale plant in the 500 to 700 M W range every year to catch up with demand, requiring new investment of about US$1.0-1.5 billion annually. Clearly, the public sector alone i s not in a position to undertake investment o f this magnitude, and attracting large-scale private investment in gas exploration and production and in gas-fired power generation will be essential. But that will require GOB to move forward on three interlinked fronts: addressing the critical issue o f efficient pricing as a priority item; urgently tackling the governance problems (including corruption) plaguing the sector; and implementing complementary reforms such as full operationalization o f BERC, corporatization o f the remaining companies, and financial restructuring o f the public companies. GOB i s beginning to address each o f these priority areas, although the pace o f reforms needs to pick up considerably. The recent proactive stance o f the C T G in the power sector signals strong support, lack o f which has been a major hindrance in the past.

Oil and Gas Sector Reforms

73. The Government recently announced signifcant increases in the prices of petroleum products, which should stem the large losses at the BPC. On April 2,2007, GOB announced a 21 percent increase in the prices o f diesel and kerosene and a 16 percent increase in the prices o f octane and petrol. The diesel and kerosene prices s t i l l remain about 10 percent short o f their tax-inclusive costs, but the shortfall i s covered by the trading surplus from the sale o f petrol and octane. GOB i s considering formation o f a committee to review prices o f petroleum products monthly to keep them in l ine with changes in international prices. The recent bo ld move on fuel price adjustment notwithstanding, because o f delays in

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recent years in responding to the sharply rising international crude o i l prices, the BPC suffered major losses and has accumulated outstanding liabilities o f about Tk 120 billion. BPC’s interest payments on these liabilities totaled about Tk 4.7 bi l l ion in FY06. It would be important to address these outstanding obligations to put BPC on sounder financial footing.

74. I n the gas sector, the Government recently approved a Gas Sector Master Plan and Strategy. This lays out the long-term strategic vision for the sector and would be the basis for Petrobangla, the state-owned corporation, to develop i t s investment program. At present, the retail price o f gas does not cover the cost o f production, operation and maintenance, and future capital investment requirement o f the sector. T h i s leaves large financing gaps at the gas utilities, undercutting their efforts to improve their financial viability and generate self financing to support their investment programs. Implementation o f the pricing pol icy adopted in FY03 to fully recover costs and capital investment needs i s a necessary f i r s t step to strengthen the sector’s performance. In addition, the Government would need to revise the upstream natural gas exploration and production terms and launch a marketing campaign to solicit interest among o i l and gas exploration companies and attract the desired new investment into the sector.

VI. The Proposed Fourth Development Support Credit and Priorities for the Next Phase

75. The proposed credit, the fourth in a programmatic series o f budget support operations, would support GoB’s ongoing policies and institutional reforms, with a v iew to accelerating growth, reducing poverty, and improving the quality o f service delivery. Building on the reform progress in core governance under the previous DSCs, DSC IV proposes to support GoB’s reforms in procurement, PFM functions, tax administration, and checks and balances on public entities. DSC IV would also support deepening o f reforms to improve the investment climate, particularly continued macroeconomic stability, trade liberalization, and better performance o f the banking and energy sectors and SOEs.

76. The Program Document la id out 12 indicative triggers for DSC IV, which were designed to support further reforms that GOB had planned to improve governance and investment climate. After assessing the performance against the 12 indicative triggers in light o f the prevailing ground realities, the Bank and GOB agreed on a set o f prior actions that constitute sufficient progress in the reform areas supported by the indicative triggers. The overall assessment o f the reform program and the progress on each o f the indicative triggers are described below.

DSC III was presented to the Bank’s Executive Board in December 2005.

77. Overall Assessment. Implementation o f the reform program supported by the past DSCs and progress toward DSC IV triggers have been satisfactory, but uneven. As mentioned before, since coming to power on January 11,2007, the CTG has taken significant steps to reduce corruption and strengthen the governance situation. Reform efforts have sought to improve the functioning o f core institutions, including the EC, the ACC, the Judiciary, and a number o f public regulatory bodies. Progress has also been good under successive governments in maintaining macroeconomic stability, liberalizing the trade regime, and strengthening the banlung sector and the quality o f PFM. Tax administration has been strengthened in some areas, although the pace o f reforms has been gradual and i s yet to translate into tangible results in terms o f revenue mobilization. The record on power sector reforms, particularly in the areas o f generation and financial viabil ity o f the sector, has been moderately satisfactory. In view o f the changed country situation and the current window o f reform opportunity, the overall assessment favors continued support to the CTG.

Indicative Trimer (1 of 12): Satisfactory implementation of an adequate macroeconomic policy framework,

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Prior Action 1: An adequate macroeconomic policy framework, conducive to growth and poverty reduction, maintained.

Prior Action 1 has been comuleted. GOB has maintained an adequate macroeconomic pol icy f ramework4espi te persistent exogenous pressures f rom high global commodity prices and political pressures o f an election year-conducive to growth and poverty reduction. T h e fiscal deficit for FY07 i s expected at around 3.5 percent o f GDP, although continued sluggishness in tax mobilization remains a concern. The consumer price index (CPI) inflation rate for FY07 i s expected to remain at the FY06 level o f around 7.0 percent, having picked up from 4.4 percent in FY04 and 5.8 percent in FY05, largely part because o f pressures f rom higher food prices. Continued strong growth o f exports and remittances have kept external balances in check and have led to an increase in foreign exchange reserves to a record level o f US$4 bil l ion. The exchange rate, which i s market-determined, has stabilized at around Tk70/US$ since early FY06. Loolung forward, financial losses and outstanding liabilities o f the energy sector SOEs, expected at over 1 percent o f GDP in FY07, are a major source o f fiscal concern. They need to be controlled through more efficient domestic pricing and explicit mechanism o f budget support as necessary to cover remaining losses, and the recently announced fuel price hike i s an important step toward that. Continued macro stability will also require better revenue performance, easing o f food supply chains, and further tightening o f the monetary policy.

The last tranche o f the IMF-supported PRGF, approved in October 2006, was a reduced one reflecting incomplete reform progress, in particular the delay in corporatizing the NCBs and continued weak revenue performance. The C T G has since taken the legal decision to corporatize the NCBs and i s moving forward with the process. The IMF recently concluded a mission to conduct the Article IV consultations. The IMF team i s in the process o f putting together i t s findings of the consultations.

Indicative Trimer (2 of 12): Deepen trade liberalization by phasing out supplementary duties to reduce average nominal protection by at least 2 percentage points subject to revenue neutrality of the proposed action, to be confirmed by a proposed joint study by the Bank and the Government.

Prior Action 2: Trade liberalization deepened with a reduction o f at least 2 percentage points in the average nominal protection.

Prior action 2 has been comuleted. The average nominal protection was reduced by 2.2 percentage points in the FY07 budget, with a 1.7 percentage point reduction achieved by cutting supplementary duties and a 0.5 percentage point reduction by cutting customs duties.

Indicative Trimer (3 of 12): Strengthen the effectiveness and accountability of the National Board of Revenue by moving it toward a more functional organization structure, consistent with the NBR Strategic Development Plan. Toward this, create and approve a new Board and senior management structure, consistent with NBR 's Strategic Development Plan. NBR wi l l have hiring flexibility to recruit from the private sector, ifnecessary. Initiate the process offilling each identified position.

Prior Action 3: Effectiveness and accountability o f the NBR strengthened by moving it toward a more functional organization structure, consistent with the NBR Strategic Development Plan, and, toward that, human resources, information and communication technology, and audit functions introduced at the NBR Board level, with follow-up plans to create three new Board positions for the three new functions.

Prior Action 3 has been comuleted. GOB has pursued a two-phased approach in this context. In the f i rst phase, it has introduced HR, ICT, and audit functions at the Board level, allocating these

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functions amongst Board members and the NBR Chairman. In the next phase, it will create separate positions for these three functions.

Indicative Trimer (4 of 12): Develop and agree specific Terms of Reference for the Managing Directors of the NCBs, and specij) a fixed tenure for them, keeping in view their prospective corporatization.

Prior Action 4: Managing director positions for Janata and Sonali banks advertised, based o n specific terms o f reference that include performance indicators for which the managing directors will be held accountable.

Prior Action 4 has been completed. In addition, GOB has also committed to advertising the managing director position for Agrani bank by June 30, 2007, which would similarly include performance indicators for which the managing director will be held accountable.

Indicative Trimer (5 of 12): Implement an NCB restructuring action plan, acceptable to I D A and in accordance with the timeline agreed with IDA.

Prior Action 5: Significant progress made in implementing an NCB restructuring action plan, in particular with the legal decision taken to corporatize the Agrani, Janata, and Sonali banks-a key component o f the NCB restructuring action plan.

Prior Action 5 has been comdeted. The key component o f the N C B restructuring plan was completion o f legal steps to corporatize the Agrani, Janata, and Sonali banks, which, for the f irst time, brings them fully under the supervisory and regulatory control o f Bangladesh Bank. On February 4, 2007, the CTG approved a draft regulation that required to turn the Sonali, Janata and Agrani banks into public companies. The Government i s committed to completing the remaining steps by July 2007 to implement the decision and complete the corporatization process. The operations o f these banks wil l be run by an autonomous board o f directors, and the banks, which previously fe l l under the Bangladesh Bank's (Nationalization) Order 1972, will now fal l under the Banlung Companies Ac t 1991. T h i s will enable the Bangladesh Bank to exercise fully i t s regulatory and supervisory powers over these newly corporatized state-owned banks.

Indicative Trimer (6 of 12): Develop and initiate implementation of an agreed Public Financial Management Improvement Plan (PFMIP), satisfactoly to IDA, with measures and timetable to address gaps, including those identified in the recently developed Public Financial Management (PFM) indicators. Among others, actions wil l include Government proposing to the Parliament Secretariat for approval: (i) steps to improve media access to the PAC proceedings; (ii) establishment of a technical support unit for PAC.

Prior Action 6: A public financial management improvement plan developed and i t s implementation initiated with measures and timetable to address gaps, including those identified in the recently developed public financial management indicators.

Pnor Action 6 has been completed. A PFMIP has been prepared; it was endorsed by the development partners and approved by the Finance Division. Future development assistance in the P F M reform 'area will be guided by the PFMIP. K e y init ial implementation measures have included: listing in the FY07 budget o f a l l explicit guarantees and counter guarantees provided by the government against loans negotiated by various state-owned financial and non-financial enterprises; and reconciliation o f government-wide transactions o n a monthly basis starting f rom July 2006. GOB has also approved a technical assistance project by the Parliamentary Secretariat to strengthen the PAC, which, among

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other things, would enable media access to P A C proceedings and establishment o f a technical support unit for PAC, after the next Parliament i s elected and begins i t s work.

Indicative Triaaer (7 of 12): Operationalize and make functional the complaints mechanism for procurement, including the establishment of independent review panels, meeting the standard stipulated in the procurement regulations. Publish quarterly procurement MIS results on CPTU’s website with peformance indicators for key implementing agencies in the infrastructure and power sector (REB, LGED, RHD, and BEDB).

Prior Action 7: Effectiveness and transparency o f public procurement enhanced with (i) establishment o f a complaints mechanism for procurement, including independent review panels, meeting the standards stipulated in the procurement regulations; and (ii) publishing, o n a pi lot basis, o f quarterly procurement management information systems results on CPTU’s website with performance indicators for key implementing agencies in the infrastructure and power sectors.

Prior Action 7 has been completed. (a) The complaint mechanism appears to have been functional for most o f the 12 cases handled so far. GOB formed four review panels, each with three members as per the provisions o f the Public Procurement Regulations (PPR) 2003 (one senior retired person, one legal person, one business chamber person). The review panels have resolved the cases before them, and now appear to be operating independently with improved adherence to the PPR 2003. N o complaint was pending for review as o f November 8, 2006. (b) Four agencies (REB, LGED, RHD, and BWDB) were init ially selected for integration with the Central Procurement Technical Unit (CPTU) for data transmission. Later, in consultation with the Bank, GOB decided to start with REB and LGED on a pi lot basis. Data f rom those two agencies o n procurements valued above Tk 10 mi l l ion during FY05-06 have been received and are being processed for publication o f an MIS report on a trial basis o n CPTU’s website.

Indicative Trimer (8 of 12): Take appropriate steps to strengthen the Anti-Corruption Commission and its management.

Prior Action 8: Appropriate steps carried out to strengthen the Ant i -Comption Commission and i t s management.

Prior Action 8 has been completed. GOB has strengthened the effectiveness o f the A C C with the following key actions: (a) The A C C was recently reconstituted with far more effective personnel, replacing the Chairman and the two other Commissioners because o f poor performance; (b) an interim organogram for the A C C has been approved and gazetted; and (c) rules relating to (i) service and recruitment and (ii) prosecution have been approved.

Indicative Tripper (9 of 12): Formulate and adopt a least cost generation development plan for generation investments in the power sector and ensure that al l proposed generation investments, extant and in the future, are consistent with this plan. To complement this plan, also formulate and adopt a Generation Financing Plan which wi l l defne the Government’s financing strategy for generation investments including, inter alia, the proportion of generating capacity and the specijk generation investments to be procured under private and public fnancing and ownership, respectively. A l l procurement of generation capacity wi l l be in line with the Public Procurement Regulations and, as applicable, the Private Power Generation Policy and the Private Sector Infrastructure Guidelines. I n the event of any deviation IDA wi l l be informed.

Prior Action 9: Policy environment for expanding generation capacity strengthened with (i) adoption o f a least cost generation development plan for generation investments in the power sector; and (ii)

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selection o f expert consultants to help formulate a generation financing plan including, inter alia, the proportion o f generation capacity and the specific generation investments to be procured under private and public financing and ownership, respectively.

Prior Action 9 has been comuleted. The least cost generation development plan has been adopted with the understanding that al l proposed generation investments, extant and in the future, would be consistent with said development plan. The consultants selected for formulating the generation financing plan are expected to complete the task in FY08.

Indicative Tr iwer ( I O of 12): Issue a bid package to pre- qualified private investors for at least one new, baseload power plant, consistent with the above referenced regulations and policies.

Prior Action 10: Prospects for developing a fair, transparent and competitive procurement process for procuring a new, baseload, gas-fired combined-cycle power plant in the power sector, consistent with the Recipient’s regulations and procurement policies enhanced with the appointment o f a reputable international transaction adviser for the process.

Prior Action 10 has been completed. It also i s noteworthy that in addition to recruiting the international transaction adviser the Government has avoided instances o f flawed procurement o f large power plants, a key concern at the time the indicative trigger was negotiated with GOB. These steps, in the overall context o f the strong anti-corruption measures being taken by the CTG, signal significant improvement in the prospects o f establishing a fair, transparent, competitive procurement process for large power plants.

Indicative Tr imer (II of 12): For the Small Power Plant program (to mitigate load shedding in the interim to bringing suppry and demand of generating capacity into balance) make al l procurement of power on the basis of transparent and competitive procedures including the issue of model security packages (PPA, FSA) and licensing agreements and selection criteria based on technical competence, jnanc ia l capabilities and tangs ofered by competing bidders, with relative weights consistent with international good practices.

Prior Action II: All possible steps taken to ensure that the process o f procuring power under i t s Small Power Plant Program i s transparent and i s based o n competitive procedures, including the issue o f model security packages and licensing agreements, and selection criteria based on technical competence, financial capabilities and tar i f fs offered by competing bidders, with relative weights consistent with international good practices

Prior Action 11 has been comuleted.

Indicative Tr imer ( I2 of 12): Initiate implementation of the Power Sector Financial Recovely and Restructuring Plan (covering specific actions on asset re-valuation, debt restructuring, pension liabilities, targs, arrears).

Prior Action 12: Financial situation in the power sector improved with (i) adoption o f a financial recovery and restructuring plan (covering specific actions on asset re-valuation, debt restructuring, pension liabilities, tariffs, arrears), and init ial implementation o f the plan with the adjustment o f power tariffs and collection o f payment arrears to power utilities; (ii) reduction in BPDB’s average payment arrears to IPPs to less than 45 days; and (iii) submission to the Council o f Advisers o f a financing plan, including a combination o f budgetary support and tar i f f increases, t o put the sector on financial recovery path

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Prior Action 12 has been completed. The Government has adopted the FRP, in principle, and has further agreed to start restructuring the balance sheets o f a l l power utilities f rom July 2007. I t has also initiated implementation o f the plan by adjusting power tar i f fs and collecting payment arrears to power utilities, and has further agreed to start restructuring the balance sheets o f a l l power utilities f rom July 2007. Recognizing the fragile financial position o f the BPDB, which i s causing it to not be current on its payments to the IPPs and other creditors, the Government has: (a) reduced BPDB’s average payment arrears to IPPs to less than 45 days; and (b) submitted to the Council o f Advisers a financing plan, including a combination o f budgetary support and tar i f f increases, to put the sector on financial recovery path.

Priorities for the N e x t Phase o f Reforms

78. The Government’s PRS proposes a wide-ranging development agenda, which the C T G has adopted in i t s entirety. Appropriately under the current conditions, and also consistent with the emphasis in the PRS, the CTG has accorded i t s highest priority to strengthening governance, and, within that, to mending the electoral system, restoring essential law and order conditions, and strengthening key institutions o f accountability such as the EC, the ACC, and the judiciary. Moreover, the C T G remains committed to deepening the reforms initiated by the last elected government in the core governance areas o f public expenditure and financial management, public procurement, tax administration, economic deregulation, and public administration. T o further strengthen the investment climate, the C T G proposes to ensure continued macroeconomic stability, deepen trade liberalization and banking sector reforms, and address the burgeoning concerns in the power sector, hitherto an area o f slow reforms.

79. In the arena o f political governance, the CTG, having reconstituted the E C with competent and neutral appointees, wants to implement further electoral reforms to create the necessary enabling environment for the conduct o f free and fair elections. The EC has commenced revising the voter l ist, which reportedly includes a large number o f fraudulent names, in accordance with the Supreme Court verdicts on the matter. It will enforce existing legislation, regulations and court decisions relating to the disclosure o f election finance costs; the submission and publication o f candidate information (disclosure o f assets and liabilities, criminal records, sources o f funding, business interests and so forth); and election funding costs, in addition to sanctions for fail ing to comply with the requirements o f the Representation o f People Order. It will also impose registration requirements o n the polit ical parties, and take further actions to minimize the influence o f money and muscle power o n the political system. The dnve to bring to justice politicians and government officials suspected o f large-scale corruption will continue, within the bounds o f the constitutional legal system. Legal provisions with respect to asset disclosure are to be enforced and convicted persons will be barred from contesting elections. Finally, the EC is considering the possibility o f issuing voter ID cards. This will need to evaluated against the delay it will likely cause in holding the elections.

80. Curbing corruption and improving governance will need to go beyond investigations, prosecutions, and convictions. The emphasis over the longer term will have to be on prevention. The CTG has begun exploring the possibility o f overhauling the Public Services Commission as the f i rs t step in revitalizing the c iv i l service. Given Bangladesh’s experience o f recent years, more effective checks and balances will be needed to restore the confidence o f citizens in the government. The reconstitution of the ACC and the E C and the separation o f the judiciary f rom the executive are a l l important steps in the right direction. Efforts to strengthen these and a l l other institutions are underway and will be helpful in restoring citizens’ confidence. The appointment o f persons o f integnty and competence to key positions o f statutory office has already been evident in the manner in which these institutions have started robustly to pursue their constitutional or statutory mandates.

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81. GOB recognizes the importance o f improving the quality o f PFM for achieving the development goals set forth in the PRS. It aims to reinforce the envisaged improvements in budget procedures with enhancements in financial management, procurement, and public administration. GOB also remains committed to time-bound implementation o f the PFMIP to boost performance o f the core financial management functions. Building o n the tremendous improvements to the regulatory framework o f the public procurement system, GOB plans to strengthen the enforcement o f the recently adopted landmark Procurement Law. The proposed interventions under the second procurement reform project, as mentioned in para 49, constitute important next steps. Furthermore, in addition to earlier steps o f eliminating a major conflict o f interest by separating the external audit and internal accounting functions, GOB i s committed to making the C&AG functionally and administratively independent including by earmarking for it nondiscretionary budgetary allocation.

82. The Government also recognizes that, in addition to more efficient public spending, progress in key development areas such as health, education, infrastructure, and social protection will require higher levels o f public expenditure, for which revenue mobilization needs to be significantly improved. Implementation o f the tax administration modernization program recently developed by GOB (para 39) would be essential for better revenue mobilization, with special emphasis on organizing the NBR along functional lines (rather than the current tax-by-tax structure); improving taxpayer services, HR policies and procedures; and developing I C T capacity. These actions would need to be supported by a comprehensive review o f tax policy and necessary legslative reforms to correct major tax policy distortions, and strengthening o f customs administration.

83. Continued macroeconomic stability and sustainability will remain essential for an investment climate conducive to efficient private investment and growth. Sustainability o f public sector debt, necessary for macroeconomic stability, would require stronger revenue mobilization efforts and containment o f the recent increase in the losses o f the energy sector SOEs. The latter can only be achieved by implementing a more efficient pricing mechanism for energy products, which automatically adjusts prices on a regular basis in response to changes on the cost side. In the interim, as energy prices are adjusted to their cost recovery levels, the energy companies would need explicit liquidity support f rom the budget to keep them operational and prevent further bleeding o f the already fragile public sector banks. Bangladesh Bank intends to implement policies that seem quite judicious: further tightening monetary policy to ward o f f nascent inflationary pressures, malung flexible use o f the interest rate, and continuing the reliance on market mechanisms to determine the exchange rates.

84. A stronger investment climate will also require deepening o f financial sector and trade reforms, a renewed focus on overcoming the infrastructure challenges, and further deregulation o f the domestic economy to lower the cost o f doing business. The recent success in divesting Rupali Bank would need to be replicated next for Agrani Bank and then Janata Bank. In addition, banlung regulation would need to be strengthened by further tightening prudential regulations in line with international practices and enhancing the monitoring capacity at the Bangladesh Bank. In the area o f trade liberalization, authorities would benefit f rom continued reduction in the nominal protection levels, with emphasis o n phasing out the plethora o f para-tariffs that not only increase protection levels but also generate rent-seelung opportunities. T h i s would need to be supplemented with a well-functioning duty drawback system. The CTG’s decision to make power sector reform a high priority area i s a welcome move. I t s focus o n attracting private investors in power generation (through a fair, transparent, and competitive bidding process), adhering to least-cost principles, preparing a Generation Financing Strategy, and implementing the recently adopted FRP also seems quite appropriate.

85. The C T G rightly views the current situation as a major and unique opportunity for implementing bold reforms and turning around weak governance. At the same time, i t feels that this ambitious reform program will need flexible concessional financing, and has requested continued support f rom the Bank in

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the form o f a budget support operation in FY08, similar in nature to the DSCs. In view o f the strong track record o f the CTG thus far, the Bank would be open to the idea, provided the reform efforts in the priority areas continue to be satisfactorily implemented. Under appropriate conditions, the exact form, timing, and scope o f the operation will be negotiated with the Government later this year.

86. Whi le the exact indicative triggers for the next budget support operation will be identified at the time the operation i s negotiated with GOB, continued macroeconomic stability and substantial reform progress in the areas o f trade liberalization, tax administration, public expenditure and financial management, procurement, and power and banking sectors would be considered essential. K e y reform actions in the Government’s medium-term pol icy matrix that could be considered for support under such an operation include the following:

0 Trade liberalization. (i) Substantial progress on merger o f remaining supplementary duties with existing customs duty rates, ensuring one tar i f f rate for each tar i f f line. (ii) Substantial progress on elimination o f protective use o f VAT. (iii) Continued phased reduction in average nominal protection rates.

Banlung Sector Reforms. (i) Bringing the Agrani Bank to the point o f sale, a process that would be facilitated by appointment o f a competent sales adviser, as in the case o f Rupali Bank. (ii) Agreement between managing directors o f the Agrani, Janata, and Sonali Banks and GOB on key performance targets for the respective banks and implementation o f mechanisms to hold the managing directors accountable for achievement o f those targets.

Public Expenditure Management. (i) Extension o f the pi lot MTBF approach to at least four more ministries. (ii) Increased role o f high-level decision makers in budget planning through the operationalization o f the Budget Management Committees.

Public Financial Management. (i) Phased implementation o f the PFMIP. (ii) Establishment in line ministries o f planning and budgeting wings and functional financial management un i ts within them.

Procurement Reforms. (i) Establishment o f an electronic government procurement system at CPTU, and piloting o f the system at key agencies such as RHD, LGED, REB, BWDB. (ii) Strengthening o f CPTU with appropriate staffing and infrastructure.

Tax Administration. (i) Creation o f three new member positions at the NBR Board, to take charge o f the functional responsibilities o f audit, ICT, and HR that have temporarily been assigned to existing members. (ii) Establishment o f a unique taxpayer identification number for both Income Tax and VAT.

Macroeconomic Stability. Adherence to the macroeconomic framework agreed with the IMF. Further monetary tightening to ward o f f inflationary pressures, full adjustment o f energy prices to their cost recovery levels to bring energy companies to at least to a break even point, and continued flexible use o f exchange rates to cope with external pressures.

Power Sector Reforms. (i) Implementation o f the FRP, including by completing financial restruc&ng o f power sector companies and ensuring BPDB’s full financial recovery. (ii) Enabling private investment in power generation though a fair, transparent, and competitive bidding process, adhering to least-cost principles. (iii) Completion o f the Generation Financing Strategy.

0

0

0

0

0

0

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VII. Implementation Arrangements

Monitoring and Evaluation

87. Improving the quality and effectiveness o f policies will require more timely and reliable information for policy analysis and assessing outcomes. The PRS outlines a monitoring framework, which includes monitoring indicators, data sources, and institutional arrangements for monitoring and providing feedback to policy makers. Sources include existing data as we l l as planned annual surveys for traclung intermediate indicators related to access, usage, and satisfaction with public services.

88. Repeated rounds o f Household and Income Expenditure Survey (HIES) conducted by the Bangladesh Bureau o f Statistics (BBS) are the single most important basis for poverty monitoring and analysis. The HIES o f 2000 provided baseline information for most outcome indicators identified in the PRS, and the 2005 round o f HIES updated information on these indicators. The recently published HIES 2005 report incorporates poverty trends and patterns based on a revised poverty line, reflecting the latest sampling design and consumption pattern. These provide a solid basis for consistent poverty monitoring f rom future rounds o f HIES. Additional information on MDG indicators i s provided by other surveys such as the Demographic and Health Surveys and Child Nutrit ion Surveys. A Labor Force Survey conducted by the BBS (the latest round was conducted in 2005-06) provides information on indicators related to employment and characteristics o f the labor force.

89. Efforts are also underway to improve monitoring o f performance in PFM. A s noted, GOB has developed baseline ratings o f the core P F M functions and has instituted a PFMIP to improve performance.

90. Successful monitoring depends critically on institutional arrangements and their capacity. A National Poverty Focal Point (NPFP) has been created in the General Economics Div is ion o f the Planning Commission to monitor poverty and track progress in implementing the national strategy for economic growth and poverty reduction. The NPFP i s expected to evolve into an effective and technically competent Poverty Monitoring Unit with strong linkages across ministries and with various stakeholders outside the Government. The BBS and the Planning Divis ion also intend to develop an integrated National Databank accessible to a l l government departments.

91. As noted by the PRS, improving the capacity o f the key monitoring institutions i s critical to improving the quality o f information systems. In recent years, capacity improvement in monitoring and evaluation (M&E) has occurred along multiple dimensions. Technical assistance from the World Bank, including an ongoing Institutional Development Facility grant, has helped BBS improve the survey quality and speed o f data processing over successive rounds o f HIES. The capacity o f B B S to measure and analyze poverty has benefited f rom close on-the-job collaboration with the Bank. A number o f training courses and workshops-some administered by the Wor ld Bank Institute-have hrther enhanced the analytical capacity at BBS as wel l as other government departments and nongovernment think tanks. The Government wishes to continue upgrading the capacity for M&E, with necessary support f rom development partners. Whi le continuing with the current technical support on poverty monitoring and analysis, the Bank i s also expanding i t s assistance to BBS. A new subproject for B B S under EMTAP proposes to help design systems to monitor (a) welfare indicators and correlates o f consumption poverty more frequently than currently possible, and (b) labor market indicators annually rather than the current practice o f every 3-4 years through the Labor Force Survey.

92. Loolung ahead, the M&E agenda will benefit f rom improving the policy linkages with poverty diagnostics, for which the NPFPPoverty Monitoring Unit would play a key coordinating role. The outcome indicators available f rom the HIESs can be used to better define longer-term targets, align pol icy priorities to these targets, and monitor progress. Selecting and consistently tracking a set o f output or

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intermediate indicators will improve the feedback from monitoring to implementation o f specific policies or programs.

93. Overall, the mentioned efforts to strengthen monitoring and evaluation systems provide an excellent opportunity to evaluate the various reforms supported under the DSCs. If implemented successfully, they should further improve the quality o f information and analyses to underpin pol icy making and establish a stronger focus o n results within the Government.

Credit Administration, Disbursement and Auditing

94. Borrower, Credit Amount, Terms and Tranchinq. The borrower i s the People’s Republic o f Bangladesh. A single tranche Credit o f about SDR 132.2 mi l l ion (US$200 mi l l ion equivalent) would be made available upon credit effectiveness, anticipated for June 2007. The closing date o f the Credit i s December 3 1,2007.

95. Disbursement. Proceeds o f the Credit will be disbursed to a specific deposit account o f the Ministry o f Finance and Planning established at Bangladesh Bank for this purpose; the deposit account i s part o f the country’s official foreign exchange reserves. An amount equivalent to the Credit proceeds will then be credited to an account o f the Government to finance budgeted expenditures. Transactions and balances o f the Government account will be fully incorporated into the Government’s accounting records and financial statements. Disbursement will not be linked to any specific purchases and no procurement requirements will be needed. If any portion o f the Credit proceeds i s used for ineligible purposes as defined by the Financing Agreement, IDA will require the Borrower either to return that amount to the deposit account or refund the amount directly to IDA.

96. Fiduciarv Risk and Audit. Fiduciary arrangements for this operation are n o different f rom the fiduciary arrangements used for managmg the Government’s own foreign exchange reserves at the Central Bank and budgetary resources through the treasury system. Whi le recent assessments o f these fiduciary arrangements continue to highlight a weak environment, efforts have been made in recent years to improve the systems, with significant results.

0 First, a comprehensive reform effort t o improve PFM institutions, supported by this operation and parallel technical assistance activities i s ongoing (paras 41-49). T h i s includes reforms to improve budget planning, accounting and auditing o f government transactions, financial reporting and procurement. More recently, accounting transactions are being computerized, improving the accuracy and timeliness o f public financial information. Reconciliation o f budget accounts and corresponding bank accounts has been improving and computerization i s also being extended to capture these transactions, extending computerization to beyond the treasury system.

Second, o n the foreign exchange side, the recent IMF safeguard assessment confirms that progress has been made on strengthening Bangladesh Bank’s safeguards framework in a number o f areas, including through the publication o f Bangladesh Bank’s financial accounts (according to International Financial Reporting Standards), reconciliation o f monetary data reported to the IMF with the audited accounts and improvements in foreign exchange management. Starting f rom FY03, the Bangladesh Bank has had its financial statements audited by internationally affiliated audit f i r m s in full compliance with international standards on auditing. The entries o f the deposit account will, upon request f rom IDA, be audited by independent auditors acceptable to IDA under terms o f reference in accordance with international standards on auditing.

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Environmental Issues

97. Overall, the policies supported by DSC IV will not have significant negative effects o n the environment, natural resources, or forests. Many o f the policy actions may, in fact, indirectly generate environmental benefits by reducing pressures on the natural resources and may facilitate the adoption o f cleaner technologies in production sectors, thus leading to better environmental outcomes.

98. The effects o f the policies supported by the proposed DSC IV are sector specific. Deepening trade liberalization and reducing average nominal protection may generate indirect environmental benefits by reducing pressures on natural resources which are being overexploited. A reduction in tariffs will tend to increase imports and reduce the domestic price, thereby easing pressures o n these resources. Bangladesh i s a net importer o f wood products because o f i t s l imited and degraded forest cover. Lower tariffs on wood products can also be expected to ease pressures on fell ing for commercial purposes. In the industrial sector, there i s cross-country evidence that import competition tends to improve compliance with environmental regulations. However, given the weak regulatory environment, in the interim, negative impacts may arise if increased competition encourages the use o f cheaper pollution-intensive technologies. The net impact remains uncertain and will vary by sector, the degree o f competition, and the access to cleaner technology. The limited evidence based on cross-country analysis indicates that in most cases access to international markets and import competition has n o detrimental environmental impact. While i t i s l ikely that this i s the case in Bangladesh, the issues need further study.

99. Strategic private investors are usually more responsive than the public sector t o environmental regulations. Therefore the proposed reforms to divest public enterprises could potentially y ie ld environmental improvements. But there are r isks associated with contaminated sites and future liabilities f rom the legacy o f pollution. Policies to address issues o f environmental l iabil i ty for past contamination and continuing pollution by SOEs undergoing privatization have been agreed with the Government as part o f the Enterprise Growth and Bank Modernization Project. These policies include provision for the environmental audit o f potentially contaminated sites prior to sale, although greater attention to the application o f these measures i s warranted. The Bank will continue to monitor implementation o f these policies.

100. The adoption o f least-cost generation development plan for generation investments in the power sector will open the sector to private investment which could lead to more effective utilities operation and adoption o f cleaner technologies. Whi le these efforts may improve operational efficiency, they are not expected to lead to significant impacts on natural resources or forests. The analysis increases concern about the issue o f indoor air pollution. The majority o f poor households currently re ly o n biomass fuels for cooking purposes. A l imited survey o f household fuel consumption in Bangladesh has found that it i s too expensive for most households to use electricity for coolung. Therefore, the effect o f the approved increase in power tar i f f o f 5 percent o f urban retail supply and 10 percent on bulk supply i s unlikely to have significant negative impact but will be studied further. The Bank has launched a nonlending technical assistance to addressing the health impacts o f indoor air pollution caused by cooking fuels and opportunities for using improved stoves that may improve fuel efficiency as wel l as reduce exposure to indoor air pollution. Conversely, in the commercial sector price reform may lead to conversion to energy efficient technologies that may yield environmental benefits.

10 1. While the proposed operation does not have any significant environmental implications, the extent o f environmental degradation poses a substantial social and economic concern. Analysis in the recently completed Bangladesh Country Environmental Analysis suggests that pol icy initiatives to reduce environmental health r isks associated with poor water quality and urban and indoor air pollution could result in economic savings o f as much as 3.5 percent o f GDP. A number o f critical issues regarding environmental health, natural resource productivity, and urban and industrial pollution have been at the

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center o f Bank's policy dialogue with GOB and will remain a strategic challenge o f utmost importance. The Strategic Environmental Assessment o f Dhaka Area Development Plans i s in progress and will support the institutional coordination for better management o f Dhaka area and will respond to the increasing environmental and governance challenges. Equally important i s to continue the institutional capacity building support to the Department o f Environment (DOE) to better control the rapidly escalating urban and industrial environmental challenges facing Bangladesh. Priority actions are being taken for updating the DOE Strategic Plan prior to submitting for approval by the Ministry o f Environment and Economic Relations Division. Strengthening environmental institutions and transparency should improve the capacity o f regulating bodies and lead to better environmental compliance. Improved access to environmental information wil l increase the awareness o f the public and engage c iv i l society in formulation o f environmental policies and protection o f environmental resources.

VIII. Benefits and Poverty and Social Impact o f Proposed Reforms

102. The DSC series has sought to support reforms aimed at strengthening prospects for stronger economic growth, improved governance, and faster poverty reduction. By most measures, Bangladesh's recent development record justifies th is support. Economic growth i s at historically high levels, poverty fe l l by 9 percentage points between 2000-05, and most o f the MDGs seem attainable. Growth has benefited f rom macroeconomic stability, trade liberalization, regulatory reforms, banking reforms, some improvements in infrastructure provisioning, and more efficient public expenditure management. These are al l areas that the DSCs have explicitly supported. The institutional reforms supported by the DSCs have a longer gestation period and therefore it i s too soon to judge their efficacy. Nonetheless, broad- based governance reforms targeted at strengthening core governance functions-such as PFM, tax administration, public administration, and checks and balances o n public entities-are expected over the longer term to improve public service delivery, reduce systemic corruption, and strengthen the business environment.

103. The specific reforms supported by DSC IV are expected to have a positive net income and social impact on the poor. Core governance reforms such as making the ACC more effective and improving the PFM functions, including public procurement, are expected to deter and reduce future misuse o f public resources, and the saving from this can be used for pro-poor spending. Measures to improve budgetary planning and execution would help strengthen the targeting o f pro-poor public expenditure toward the needy and improve the quality o f projects under the ADP which would enhance prospects for rural and urban growth. Improvements in tax administration being sought by the DSC-supported reforms would create the fiscal space for expanding pro-poor policies and programs and pro-growth capital expenditure, particularly in the critical area o f power and other infrastructure. Insufficient trade openness has been identified as a key contributor to weak export competitiveness environment and lack o f export diversification in Bangladesh." Trade liberalization measures accordingly would improve prospects for export diversification into labor-intensive manufacturing in areas other than RMG, which would create j o b opportunities for the population, including the poor, just as the RMG boom generated close to 2 mi l l ion jobs-90 percent o f them for women from poor households.

104. Reforms in the energy sector are designed to improve access and reliability o f power supply, especially to the poor. Whi le a significant proportion o f the poor have electricity connections, the number o f hours per day that they actually get the electricity i s very l imi ted because o f generation shortfalls. Financial sector reforms will improve the efficiency o f state owned banks, which i s l ikely to improve access to finance for the poor and the non-poor. Moreover improved efficiency o f banks would lead to reduced interest spreads, thereby reducing borrowing rates for the poor.

'' World Bank, 2005, Bangladesh: Growth and Export Competitiveness, Report No. 31394-BD, Washington, DC.

34

105. Recent analysis by the Bank using HIES 2000 and HIES 2005 data shows that the direct social impact o f energy price increases-in terms o f the effect on household consumption and welfare-is l ike ly to be quite small for the p00r.l~ T h i s i s because expenditure on petroleum products, electricity, and natural gas, and on public transport accounts for only about 5 percent o f the average household budget o f the poor. T h e analysis further finds that the indirect (second and third round) impact o f fuel prices increases on the poor i s also expected to be marginal.

IX. KeyRisks

106. Political Risks. The sustainability o f the reform process put in train by the C T G i s ultimately l inked to the smoothness o f the polit ical transition. The CTG is making good efforts to create conditions conducive to free and fair parliamentary elections, yet the timing o f the elections remains a bit uncertain: the C T G has indicated that elections will be held before the year 2008 i s over. The CTG enjoys widespread public support, but it may erode if elections are postponed indefinitely. The bilateral development partners are taking the lead in w o r h n g with domestic civic organizations and the government to help an early and smooth return to democracy. The Bank has also remained in close contact with the reform-minded members o f the two major political parties to ensure broader polit ical support for the DSC-supported reforms. Fortunately, both parties agree on the broad reform priorities. In addition, t o influence the sustainability and deepening o f the reforms, the timing, scale, and scope o f future budget support operations would be l inked to continued commitment o f the Government to the reform process.

107. Fiduciary Risks. Fungbility o f h n d s implies that budgetary resources may be diverted or misused, which poses a particular r i sk t o operations, such as DSC IV. The Government, however, has a good record o f allocating public spending to key development sectors, including social spending and infrastructure. T o further mitigate the risk, auditing arrangements and financial management within government ministries are being strengthened with DFID’s assistance. The new procurement l aw and, once in place, i t s implementation rules should further reduce the scope for misuse o f budgetary funds in contracting. External oversight by the C&AG’s office i s also being strengthened. These measures should mitigate the overall fiduciary r i sks associated with the performance o f the P F M systems. T o enhance the safeguard framework, Bangladesh Bank has started strengthening i t s financial management with support f rom the IMF and the IDA-financed Central Bank Strengthening Project.

108. Implementation capacity risks. Implementation capacity i s a serious bottleneck in Bangladesh, suffering f rom centralized public administration and unsatisfactory performance o f the c iv i l service. Decentralization o f responsibilities to local governments could help, but unfortunately, there i s n o political ownership. Ongoing reforms in public administration to strengthen c iv i l service incentives and quality, accountability and training will be useful. The Bank and other development partners are also providing technical assistance to strengthen capacities in a number o f core areas o f economic management including banlung, taxation, the budgetary process, and the energy sector.

109. Economic Risks. The main economic risk stems from the weak financial condition o f SOEs, especially those in the energy sector. Sustained large losses at the energy sector SOEs have led to a build- up o f outstanding liabilities at these SOEs and exacerbated the financial fragilities o f the NCBs that are directed to finance their losses. The Bank has worked closely with GOB on this issue, continually encouraging depoliticization of price adjustment, and providing on-demand analytical notes to help inform GOB’S decision. Authorities have already responded by implementing power tar i f f increases in March 2007 and fuel price increases in April 2007 to stem losses at BPC and BPDB, respectively.

l 9 World Bank mimeo, 2007, “Petroleum Prices in Bangladesh: A Need for Regular and Appropriate Adjustments.” Washington, DC.

35

However, BPC i s s t i l l unable to service i t s large outstanding debt burden, mostly to the NCBs, which would need to be resolved. Authorities have recently also significantly reduced BPDB’s payment arrears to lPPs and stepped up efforts to recover power utilities’ accounts receivables. They have further expressed their commitment to closing the remaining pricing gap and, in the interim, to providing explicit support f rom the budget to BPDB to put the sector back o n financial recovery path. Implementation o f the FRP, which GOB recently adopted in principle, should also help alleviate the financial burden o n the power utilities. Finally, the Government i s considering divesture o f the loss-malung national airline, Biman, through a strategic partner or other appropriate means, and has sought technical assistance from the Bank and the IFC to support this move. Another important source o f economic vulnerability i s the persistently l o w tax mobilization, which severely curtains GOB’S ability t o provide public goods and services and i s a source o f risk to long-term fiscal sustainability. To address this, authorities would need to step up implementation o f the tax administration modernization program (being supported by IDA and other development partners) along with legislative reforms to correct major tax pol icy distortions and strengthening o f customs administration.

36

I

cr, m

r

N c

s

Annex 2

Annex Box 1 : Good Practice Principles on Conditionality

Principle 1 : Reinforce Ownership

The proposed D S C IV operation, just l ike the previous DSCs, supports implementation o f the government’s PRS that was finalized in November 2005 fol lowing broad-based consultations across the country and social spectrums. As noted in the JSAN, the PRS vision appropriately builds o n the pol icy triangle o f growth, human development and governance. DSC IV supports the government’s reform actions in two o f the PRS pil lars - developing an enabling environment for growth and strengthening core governance functions. The Bank, in partnership with other development partners, is also engaging the government on human development reforms through pol icy dialogue and lending under complementary operations. A major window o f opportunity has opened up with the installation o f a popular CTG. The CTG has expressed its full commitment to implementing the PRS. While i ts focus has been on governance reforms, i t i s also embarking o n a broad set o f major po l icy and institutional reforms to strengthen economic management. These measures have widespread public support.

Principle 2: Agree up front with the government and otherfinancialpartners on a coordinated accountability framework

The Bank’s support under the DSCs is centered o n the attached pol icy matrix that summarizes the key reforms in the areas o f governance and enabling investment climate that are part o f the government’s overall re form agenda. The pol icy matrix i s very much consistent with the medium-term matrix o f reforms in the FY06-09 CAS that was joint ly prepared with ADB, DFID, and Japan - the major development partners in Bangladesh.

Principle 3: Customize the accountability framework and modalities of Bank support to country circumstances

The foremost development challenge facing Bangladesh today i s o f weak governance. Perception-based indicators, including the Transparency International’s Corruption Perception Index and the W o r l d Bank Institute’s Governance Indicators, have consistently placed Bangladesh at the bottom quartile o f their cross-country ratings. Fortunately, spurred by growing citizen demand for curbing corruption and the new CTG has made the fight against corruption and weak governance i ts topmost pol icy priori ty and has undertaken important measures toward this. These measures have widespread public support. The CTG i s also carrying forward the economic pol icy reform agenda o f the previous elected government. While sensitive reforms such as trade liberalization and increases in energy prices have faced resistance f rom various pressure groups, the general public has not actively opposed them. Analytical work by the Bank shows clear benefits o f these economic reforms o n economic growth and macroeconomic sustainability and finds minimal adverse impact o f these o n the poor.

Principle 4: Choose only actions critical for achieving results as conditions for disbursement

T h e twelve pr ior actions (indicative triggers) that underpin the D S C IV were chosen f r o m the agreed pol icy matrix. Reforms supported by the proposed Credit involve crit ical steps aimed at (a) strengthening core governance functions, with emphasis o n reforms in public procurement, budget formulation and budget execution, and tax administration; and (b) improving the investment climate, by maintaining macroeconomic stability, deepening trade liberalization, and strengthening performances o f banking and energy sectors and SOEs.

Principle 5: Conduct transparent progress reviews conducive to predictable and performance-basedfinancial support

The indicative triggers underpinning the D S C IV operation were agreed with the government during D S C I11 negotiations in October 2005. At that time, the government had expressed i ts desire to receive D S C IV financing in the f i rs t quarter o f F Y 0 7 (July 2006 - June 2007). T h e delay in the D S C IV was caused by the delays in implementation o f prior actions in power, banking, and anti-corruption reform, and several months o f pol i t ical upheaval. Nonetheless, the D S C IV financing was included by the government in i t s F Y 0 7 budget. The pol icy matrix contains a limited number o f outcome indicators which are closely l inked to the supported pol icy actions and will be assessed as part o f the operation implementation.

44

Annex 3

4.5

Bangladesh at a glance

Growth of exports and imports (%)

30T

POVERTY and SOCIAL

2006

lili 6.0

Bangladesh

1 -lo

~

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

Average annual growth, 2000.06

Population (%) Labor force (%)

Most recent estimate (latest year available, 2000.06)

Poverty (% of population below nabonal poverly line) Urban population (% of total population) Life expectancy at birth (years) Infant mortality (per f.OO0 live births) Child malnutntion (% of children under 5) Access to an improved water source (% ofpopulation) Literacy (% of population age 1%) Gross primary enrollment (% of school-age population)

Male Female

KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1986

GDP (US$ billions) 21.2 Gross capital formationlGDP 16.7 Exports of goods and services/GDP 5.4 Gross domestic savingdGDP 9.8 Gross national savings/GDP 16.9

Current account balance/GDP -5.1 Interest paymentdGDP 0 7 Total debtlGDP 38 1 Total debt service/exports * 28 4 Present value of debt/GDP Present value of debffexports

1986-96 1m.08 (average annual growth) GDP 4.2 5.4 GDP per capita 1.8 3.4 Exports of goods and services 11 7 9.6

7.9 8.0

14.1

144.4 480 69.9

1.9 2.2

50 25 63 56 48 74 41

109 107 111

I996

40.7 20.0 11.1 12.4 20.0

-3.2 0.5

37.7 11.4

2005

6.0 4.0

15.6

- 2 0 1

-~xports *imports

South LOW- Asia Income

1,470 2,353 684 580

1,005 1,364

1.7 1.9 2.1 2.3

29 31 63 59 66 80 45 39 84 75 60 62

110 104 116 110 1 05 99

2005 2006

60.0 62.0 24.5 25.0 16.6 17.8 20.0 20.3 258 26.6

-0.9 0 9 0.4

30.6 5.8

22.0 96.5

2006 2006-10

6 7 6.3 4.8 4.5

15.7 12.5

Development diamond'

Life expectancy

T

Gross primary

enrollment capita

L

Access to improved water source

-Bangladesh ~ Low-income group

I Economic ratios'

I Trade

Domestic savings

Capital formation

I 1 L

Indebtedness

- Bangladesh - Low-income group

STRUCTURE of the ECONOMY

(% of GDP) Agriculture Industry

Services

Household final consumption expenditure General gov't final consumption expenditure Imports of goods and services

Manufacturing

(average annual growth) Agriculture Industry

Services

Household final consumption expenditure General gov't final consumption expenditure Gross capital formation Imports of goods and services

Manufacturing

1986 I996

31.9 25.7 21.5 24.9 14.0 15.4 46.5 49.5

85.6 83.2 4.3 4.4

12.2 18.7

1986-96 1996.08

2.3 3.6 6.5 7.0 6.7 6.3 3.8 5.5

3.2 3.6 4.0 8.3 6.7 8.6 7.5 5.8

2005

20.1 27.2 16.5 52.6

76.4 5.5

23.0

2005

2.2 8.3 8.2 6.4

5.1 7.8

10.7 19.1

2006

19.5 28.1 17.2 52.4

76.1 5.6

24.4

Growth of capital and GDP (%)

T 10

5

01 02 03 04 05 OB

-GCF *GDP

Note: 2006 data are preliminary estimates. Group data are for 2005.

The diamonds show four key indicators in the country (in bold) compared with its incorneqroup average. If data are missing, the diamond will be incomplete.

45

Annex 3

Bangladesh

PRICES and GOVERNMENT FINANCE

Domestic prices (% change) Consumer prices Implicit GDP deflator

Government flnance (% of GDP, includes current grants) Current revenue Current budget balance Overall surplusfdeficit

TRADE

(US$ millions) Total exports (fob)

Raw jute Leather and leather products Manufactures

Total imports (cif) Food Fuel and energy Capital goods

Export price index (2000=100) Import price index (2000=100) Terms of trade (2000=100)

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 gold (US$ millions) Conversion rate (D€C, localNS$)

EXTERNAL DEBT and RESOURCE FLOWS

(US$ millions) Total debt outstanding and disbursed

IBRD IDA

Total debt service IBRD IDA

Official grants Official creditors Private creditors Foreign direct investment (net inflows) Potlfolio equity (net inflows)

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

Composition of net resource flows

1986

8.0

9.5 4.1

-3.1

1986

819 124 61

486 2,364

356 342

1,003

46 48 96

1986

1,043 2,587

-1,544

-126 586

-1,084

1,212 -128

29.9

1986

8,062 61

2,450

448 5

28

553 843 55 2 0

383 337

8 330 25

305

1996

6.7 4.2

9.0 2.2

-4.5

1996

3,884 91

241 3,205 6,947

570 274

1,918

85 79

108

1996

4,437 7,604

-3,167

55 1,821

-1,291

274 1,017

1,878 40.9

1996

15,341 46

5,713

672 8

92

596 548 -30 14

-117

168 279 54

225 45

180

2005

6.5 5.1

10.5 2.1

-3.8

2005

8,573 96

221 7,819

11,870 1,607 1,602 1,794

119 134 89

2005

9,750 13,917 -4,167

580 4,290

-557

624 5 7

2,929 61.8

2004

20,129 0

8,895

671 8

208

822 557 -1 6 449

4

707 615 148 467 68

399

2006

7.0 5.2

10.7 2.2

-3.3

2006

10,422 117 269

9,506 13,301 1,801 1,795 2,010

122 141 87

2006

11,718 15,707 -3,989

-786 5,347

572

-207 -365

3,488 67.2

2005

18,935 0

8,688

79 1 0

223

671 339

-9 802

1

500 547 153 394 70

325

Inflation (%) 8 7

0 4 I 01 02 03 w 05 OB

-GDP deflatw " O ' C P I

1 Export and import levels (US$ mill.)

14,000 12,000 10,000

0.000 4.000 2.000

0

8,000

W 01 02 03 04 05 OB

mExports DlmpOrtS

Current account balance to GDP (%)

2 T

-3 1

Composition of 2005 debt (US$ mill.)

F:528 G:688

C: 308

A - IBRD B - IDA D - Other multilateral F - Private C - IMF G -Short-term

E - Bilateral

Development Economics

46

Annex 4

Statistical Annexes Table 1: Government of Bangladesh Fiscal Trends

Estimate Projections (Billion Takas) 1998-99 1999-2000 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

Tax Non-Tax

Total Expenditure Current expenditure Food Account Surplus Annual Development Program Non-ADP &Net Lending Structural Adjustment Expenditures

Residual

Overall budget deficit *

Net foreign financing

Net domestic tinancing Banking system Other domestic

Privitazation Receipts

Total Debt (Outstanding & Disbursed)

Total Revenue 185.0 198.0 229.0 276.8 309.8 339.0 389.2 443.7 512.7 595.2 153.0 158.0 193.0 210.3 248.3 274.3 314.1 354.2 412.6 493 32.0

-280.0 -158.0

-7.0 -90.0 -1.0 . . .

-24.0

95.0

56.0

39.0 21.0 18.0

0.0

1004.0

40.0

-320.0 -178.0

0.0 -127.0

-9.0 ...

-6.0

122.0

57.0

65.0 32.0 33.0

0.0

1135.7

36.0

-358.0 -194.0 -2.0

-166.0 -12.0

...

16.0

129.0

50.0

79.0 37.0 43.0

0.0

1287.8

66.5

-403.6 -218.2 -2.1

-152.3 -17.2 0.0

-13.8

126.8

58.1

68.1 21.7 46.4

0.6

1448.0

61.5

-411.5 -244.5

2.7 -163.0

-6.6 -12.3

12.2

101.7

64.2

37.5 -10.7 48.2

0.0

1.536.1

64.7

-434.7 -258.6

-3.5 -167.9 -16.0 -7.8

19.1

95.7

35.9

59.8 13.4 46.4

0.0

1,621.7

75.1

-513.9 -312.5

-0.6 -185.8 -24.2 -1.9

11.1

124.7

60.9

63.8 35.0 28.8

0.0

1.764.5

89.5

-579.4 -350.4

1.2 -194.7 -41.3 0.0

5.8

135.7

49.3

86.4 58.8 27.6

0.0

1,953.9

100.1

-691.2 -428.2

-2.5 -227.6 -32.9 0.0

0.0

178.5

55.2

111.7 64.0 47.7

11.6

2.119.1

102.2

-781.3 -435.5

-5.2 -299.8 -40.8

0

0.0

186.1

90.6

95.6 63.7 31.9

0.0

2.044.9

GDP at current market prices 2197.0 2371.0 2535.0 2732.0 3,006.0 3,330.0 3,707.0 4,166.0 4,682 5235

(As percent of GDP)

Total Revenue 8.4 8.4 9.0 10.1 10.3 10.2 10.5 10.7 11.0 11.4 Tax 7.0 6.7 7.6 7.7 8.3 8.2 8.5 8.5 8.8 9.4 Non-Tax 1.5 1.7 1.4 2.4 2.0 1.9 2.0 2.1 2.1 2.0

Total Expenditure 12.7 13.5 14.1 14.8 13.7 13.1 13.9 13.9 14.8 14.9 Current expenditure 7.2 7.5 7.7 8.0 8.1 7.8 8.4 8.4 9.1 8.3 Food Account Surplus 0.3 0.0 0.1 0.1 -0.1 0.1 0.0 0.0 0.1 0.1 Annual Development Program 4.1 5.4 6.5 5.6 5.4 5.0 5.0 4.7 4.9 5.7 Non-ADP &Net Lending 0.0 0.4 0.5 0.6 0.2 0.5 0.7 1 .o 0.7 0.8 Structural Adjustment Expenditures ... ... ... ... 0.4 0.2 0.1 0.0 0.0 0.0

Residual 1.1 0.3 0.6 0.5 0.4 0.6 -0.3 0.1 0.0 0.0

Overall budget deficit 4.3 5.1 5.1 4.6 3.4 2.9 3.4 3.3 3.8 3.6

Net foreign financing 2.5 2.4 2.0 2.1 2.1 1.1 1.6 1.2 1.2 1.7

Net domestic financing Banking system Other domestic

1.8 2.7 3.2 2.5 1.2 1.8 1.7 2.1 2.4 1.8 1 .o 1.3 1.5 0.8 -0.4 0.4 0.9 1.4 1.4 1.2 0.8 1.4 1.7 1.7 1.6 1.4 0.8 0.7 1.0 0.6

Privitazation Receipts 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.2 0.0

Total Debt (Outstanding & Disbursed) 43.2 48.9 50.8 53.0 51.1 48.7 47.6 46.9 45.7 44.1 Source: IMF and Saffestimates *The overall budget deflcit for 2004/05 includes externally financed flood-related expenditure

47

A n n a 4

Statistical Annexes Table 2: Bangladesh - K e y Economic Ind icators

Estimate Indicator 1998 1999 2000 2001 2002 2003 2004 2005 2006 National Accounts (as "h o f GDP) Gross Domestic Product' 1000 IO00 100.0 I O 0 0 100.0 1000 IO00 1000 100

Agricdtwc 245 2 5 3 24.6 233 2 1 9 2 1 0 2 0 2 193 187 Indusuy 248 2 4 3 1 4 4 25 I 2 5 5 2 5 3 2 5 5 26 I 2 7 0 Services 5 0 7 5 0 4 5 1 0 483 49.1 5 0 1 5 0 2 5 0 5 5 0 4

Total Consumption 82.6 82.3 82 I 820 81 8 81 4 805 80.0 79.7 Gross Domestic Fixed invcsment 21.7 22.2 23 0 23 1 23.2 23.4 24 0 24.5 25.0

Government Invesment 6 4 6.7 7 4 725 6.37 6 2 0 6 I 9 6.21 6 3 0 private Invesment 15.3 15.5 1 5 6 1584 1678 1721 1783 1832 1867

E X ~ O ~ (GNFS)~ Imparts (GNFS)

Gross Domestic Savings

Gross National Savings

13.3 13.2 14.0 153 144 1 4 2 140 1 6 2 18 9 183 187 1 9 2 2 1 5 190 200 2 0 6 23.1 2 5 3

174 177 179 180 1 8 2 186 195 2 0 0 203

21.8 2 2 3 23 1 2 2 4 2 3 4 2 4 9 25.4 25 8 2 6 6

Memorondum Irenu. Gross Domestic Product 44,096 45,697 47,101 46,998 47,303 51,744 56,842 60,314 62,033 (USS million at current priccs) GDP p a capita (USS, Atlas Method) 3507 354 1 3673 371 1 3869 395 I 4183 447.7 4623

Real Annual Growth Rates (%) GDP at constant market prices 5.2 4.9 5 9 5.3 4.4 5 3 6.3 6 0 6.7 Gross NatioMllncomeatconstantmarkctprices 5 2 5 I 6.2 5 I 5.5 6 2 6 0 5 8 7 2

Balance o f Payments (US0 millions)

Expow (GNFS) Merchandise f o b

lmpow (GNFS) Merchandise e i/

Resource Balance Net Current Transfm Current Account Balance Net Private Foreign Direct lnvcsbnent Long T m Loans

Official private

Other Capital'

5,810 5,990 6,550 7,178 6,793 7,379 8,445 9750 11718 5,103 5,283 5,701 6,419 5,929 6,492 7,521 8,573 10422

8,049 6,772

-2,239 1,876 -463 249 560 607 -47

-395

8,527 7,217

-2,537 2,195 -477 198 787 828 -4 1

-965

9,060 7,566

-2,510 2,394 -337 194 698 57 I 127

-640

10,103 8,430

-2,925 2,171 -1,018

174 729 742 -13 -242

9,061 7,697

-2,268 2,826 237 65

921 963 -42

-514

10,285 8,707

-2,906 3,440

76 376 614 634 -20 -482

11,638 9,840

-3,193 3,743 I76 385 20 I 242 -41 -433

13,917 11,870

-4,167 4,290 -518 540 886 93 1 -45 -4 1

15707 13301

-3,989 5347 572 675 863 921 -58

-1306

151 -278 98 -384 -329 -811 -313 -67 -365 Change in Reserves

Memorandum /rems Resource Balance (Yh o f GDP) Real Annul Growth Rdtm

Merchandise Expaw ( f o b )

Merchandise Impow (c i f ) Manufactures

-5 I -5.6 -5 3 -6.2 -4 8 -5.6 -5.6 -6 9 - 6 4

153 3 5 7 9 124 - 7 4 9 3 1 6 1 139 2 1 6 197 5 0 8 0 1 3 2 5 5 118 124 119 145 - 5 4 6 6 4.8 114 - 8 7 1 3 1 130 2 0 6 1 2 1

Estimate Indicator 1998 1999 2000 2001 2002 1003 2004 2005 2006

Public Finance (as "h o f GDP at mkt prices) Total Rcvcnues 9 3 8.4 8 4 9 0 101 103 1 0 2 105 107 Cwrent Expenditure -7.1 7.2 7 5 7 7 8.0 8 1 7 8 8.4 8.4 Overall Budget Deficit -4.0 4.3 5 I 5 1 4 6 3 4 2.9 3 4 3 3 Capital Expenditure 5 6 5 6 6 5 6 5 6.2 5 6 5 5 5.7 5.7 Net Foreign Financing 2.5 2.5 2 4 2 0 2 1 2.1 1.1 1.6 1.2

Monetary Indicators MZIGDP Growth of M 2 ("A) Private Scctor Credit Growth Total Domestic Credit Growth'

27.9 2 8 7 31.5 3 4 4 36 I 37.9 3 8 9 4 0 9 4 3 5 104 128 1 8 6 166 1 3 1 15.6 137 169 195 126 138 10.5 163 144 14.9 2 1 9 1 7 0 183 13.3 13 I 13 7 17 7 12 9 9.5 20.7 17.5 20 5

Prices Indices (FY96 = 100) Merchandise Expon Price Index 110.6 1175 1175 120.3 1232 1262 135.2 1396 145.07 Mcrchandirc Import Price Index 1146 1255 1266 1362 146.4 1578 1642 1700 176.88 Mcichandirc T e r n ofTrade Index 1017 93.6 9 2 8 884 84.1 8 0 0 8 2 4 82.1 8 2 0

Nominal Exchange Rate (USSlLCU)* 4 5 4 48.1 5 0 3 54.0 5 7 4 5 7 9 58.9 6 1 5 6 7 2

Consumer Price index (?h change) 7.0 8 9 2 8 1 9 2 8 4 4 5 8 6 5 7.2 GDP Deflator (?A change) 5.3 4.7 1 9 1 6 3.2 4 5 4 2 5 1 5 2

Source Bonglodesh Bureou ofSiorisrics, Bonglodesh Bonkond IMF a/ GDP at current market price b l "GNFS" dcnotcs "goods and "on-factor services" d Other shon-term loans +other assets + made credit in the BOP d/ "LCU" denotcs "local currency Units'' A n increase m USSRCU denotes appreciation ei Total domestic credit growth in 2004105 is for lhc July-Febwry period

48

Annex 4

Statistical Annexes Table 3: Bangladesh Social Indicators

Latest Single Year Same Region/Income Group 1991-92 1995-96 1999-2000 2002-03' 2003-04 2004-05 South Asia Low-Income

Pooulation Total population end o f the year (millions)

Urban population (% ofpopulation) Total fertility rate (births per woman) Poverty (Lower poverty line) (% ofpopulation) National Headcount Index

Urban Headcount Index Rural Headcount Index

Growth rate (% annual average forperiod)

Income GNI per capita (US$)at costant prices Consumer Price Index (1995/96=100) Food Price Index (1995/96=100) Income/Consumption Distribution Gini Co-efficient Lowest Quintile (% o f income or consumption) Highest Quintile (% o f income or consumption) Public Expenditures

Health (!?A of GDP) Education (% of GDP) Social Security and Welfare (77 of GDP)

Gross Primary School Enrolment Rate (% of age group) Total

Male Female

Access to an Improved Water Source (% ofpopulation) Total

Urban Rural

Immunization Rate (% under 12 months) e

Measles DPT

Chlld Malnutrition (% of under 5 years) Life Expectancy at Birth (years) Total

Male Female

Mortality Infant (per thousand live births) Under 5 (per thousand live births)

Male (per 1000population) Female (per IO00 population) Maternal h e r 1000 live births)

Adult (15-69)

113.3 2.1 18.0 4.2

42.7 23.3 46.0

283.0

0.39 6.5

44.8

0.6 1.7 .. .

76.0

70.0 .. .

. . .

. . .

. . .

68

73

56.3 55 56

88

.. .

. . .

. . .

... 4.7

122.1 1.8

19.0 3.4

34.4 13.7 38.5

343.5 100.0 100.0

0.43 5.7

50.1

0.7 2.1 . . .

95.0 97.0 93.0

.. .

. . .

...

69 77 66

58.9 57 59

77 112

. . .

. . . 4.4

128.1 1.4

25.0 3.1

33.7 19.1 37.4

381.0 124.3 128.5

0.45 6.2

52.0

1 .o 2.2 1 .o

96.6 97.0 97.0

97.0 .. . . . .

71

49

62 61 62

.. .

. . .

. . .

278 272 .. .

133.4 1.4

27.0 2.9

.. .

. . .

. . .

400.0 136.0 137.0

.. .

. . .

. . .

1 .o 2.2 0.6

97.3 97.0 98.0

97.0 .. . . . .

76 83 48

62 . . . . . .

67 85

262 252

3

135.2 1.3

420.0 143.9 146.5

1 .o 2.1 0.6

76 87 48

65 88

3 13

137.0 1.3

3.0 .. .

25.5 13.7 29.3

440.0 153.2 158.1

0.47 5.30 52.70

1.9 0.9 0.7

97.0 97.0 98.0

97.0 .. . . . .

77

64

56 77

1,425 1.8

28.0 3.1

. . .

. . .

. . .

510.0 136.0

. . .

. . .

. . .

. . .

0.9 3.1 . . .

97 108 89

84 92 85

63 75 47

63 62 63

74 99

...

...

. . .

2,312 1.9

30.0 3.7

. . .

. . .

. . .

440.0 142.0

.. .

. . .

. . .

. . .

1.2 3.3 .. .

95 103 87

76 88 70

64 70 .. .

59 58 60

77 116

.. .

...

... Births attended b y skilled health staff (!?A) 7.0 .. . 14 12 13 .. . ...

Source: Unlocking the Potential-Proverty Reduction StrategV Paper (GOB) ,Bangladesh Bureau of Statistics and World Bank a/ Some data correspond to 2000-01 and 2001-02 c/ The immunization rates in 2003104 are for children 12-23 months old.

49

Annex 4

Statistical Annexes Table 4: Bangladesh: Key Exposure Indicators

(in US$ million unless otherwise stated)

Actual Estimate Projection 2001 2002 2003 2004 2005 2006 2007

Total debt outstanding and disbursed (TDO)

Net disbursements

Total debt service (TDS)a

Debt and debt service indicators

("/) TDO/XGS~ TDOiGDP TDS/XGS ConcessionaUTDO

IBRD exposure indicators (%)

IBRD DSiPublic DS Preferred creditor DSPublic

IBRD DSiXGS

Share o f IBRD portfolio

DSC

IBRD T D O ~ (us$miii)

IDA T D O ~ (us$miii)

IFC Loans

Equity and quasi-equitye

MIGA

15,255

557

676

166.6 32.5 7.4

93.4

1 .o 51.9

0.1 17 0.0

6,439

91 13

64

17,061

217

727

182.6 35.9 7.8

92.8

0.9

55.2

0.1 13 0.0

7,063

88 13

18,778

337

672

178.8 36.2 6.4

93.2

1.1

63.9

0.1 7

0.0 8,062

94 13

64 61

19,321

543

958

162.6 34.0 8.1 ...

0.8

39.5

0.1 0

0.0 8,208

116 12

20,364

1,010

1,018

160.9 33.5 8.0 ...

0.0

41.7

0.0 0

0.0 8,805

98 12

21,379

1,015

1,039

161.1 34.0 7.8 ...

0.0

45.0

0.0 0.0 0.0

9,480

. . .

...

22,354

975

1,107

158.9 33.3 7.9 ...

0.0

48.6

0.0 0.0 0.0

10,099

...

...

a/ Includes public and publicly-guaranteed debt, private non-guaranteed, use o f IMF credits and net short-term capital b i "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 Bank for International Settlements di Includes present value o f guarantees e/ Includes equity and quasi-equity types o f both loan and equity instruments

50

Annex 4

Statistical Annexes Table 5: Bangladesh - Progress Towards MDGs

1980 1990 2o0oa 2002 2004-05 2015

PRSP MDG targetb target

Poverty Headcount Rate' . . . 58.8 49.8 I . . 40.8 25.0 29.4 Fertility Rate (children per woman) 5.0 4.3 3.0 3.0 3.0 Infant Mortality (per 1,000 live births) 101.4 94.0 66.3 53.0 56.0 18.0 31.0 Crude Birth Rate (per 1,000 population) 33.4 32.8 19.9 20.1 . . . Crude Death Rate (per 1,000 population) 10.2 11.3 4.8 5.1 . . . L i fe Expectancy (years) 56.9 56.0 60.6 62.0 63.5 73.0 73.0 Gross Primary Enrollment (%) 61.0 72.0 96.6 86.7 97.0 100.0 100.0 Gross Secondary Enrollment (%) 18.0 19.0 42.0 52.8 44.0 95.0 Adult Illiteracy (%) 71.0 65.0 55.0 50.4 41.1 10.0 Source:Unlocking the Potential-Proverty Reduction Strategy Paper (GOB) ,Bangladesh Bureau of Statistics a/ Some data are for 1999 bl Based on the progress rate o f 1990-02 c l The poverty headcount rate refers to the upper poverty line

51

Annex 5

Dr. A.B. Mirza Md. Atizul Islam Adviser

Government of the People's Republic of Bangladesh

Ministry of Finance, Planning, Commerce, Posts & Telecommunications

1 I April, 2007

Mr. Paul Wolfow it;.., President, I n t ern at i o ina I DCL e I opmen t Assoc i at i o n . Washington 1)C 20.133. USA

L e t t e r of llevclopmcnt Policy

1. I n t r ocl u rt io n

1 . I 13ungladesh recently passed throtigli a very dif f icult phase. Political confrontation escalated to prccari o tis I eve1 s. and ass ti mud violent forms tli reatcn i ng p ~ o d tict i ve econoin ic activity and cont i niied strong progress on ecoiioinic and social dc\elopment. In tlne run-up to t l ie transfer o f power froin tlie otitgoiiig Banglaclcsli Nationalist Party (BNP)-led 4-pat-ty coalition to the caretaker government (CTG) at the end ot'Octobcr 2006. t l ie two ma.jor alliiinces Fdiled to agree on the choice o f key piiblic officials and t 11 c i 11 s i t ti t i o 11 ii I arrange in en t tin de rp i n 11 i n g t 11 c expected e I ec t i o n to Bangladesh ' s 9"' Par I i a in e n t . The coiiscquent standoff bet\\een the two alliances manifested in several country-wide blockades and general strikes. causing a niiinber o f deaths and hundreds o f injuries. A change i n the caretaker government (C1 G ) ~ i i t l i the declaration o f a state o f emergency on January 1 I , 2007 averted what could have been an itinmitigated disaster. 'The necv CTG i s committed to transferring power to an elected government at the earliest. once the conditions for a free, fair and credible election are i n place.

1.2 h'ot~\.itlistatidiiig the pol i t ical instability. Bangladesh has made signi ticant progress during the pas t !cars ~ v i t h the wide-ranging reforin program that has been supported b j the World Bank's llcvclop,~ncnt Support Credit (DSC) series since 2003. According to the latest Household Income and I:spciiclitiirc Survey (I lll:,S), the proportion ol'peoplc l i \ , ing in povert j ' fe l l from 49 percent in 3,000 to 40 pcrccnt i i i 2005. with the proportion 0 1 ' t l iosc in Iiardcore povei-tq fal l ing froin 3 4 percent to 25 percent. Rural po\.ertc fe l l lioiii 5.3 percent to 44 percent and uiban poverty froin 37 percent to 39 percent. There \vas a modest increase in economic inequality. as measured by the Gini coefficient o f consumption expend i t tire.

1 .i I.:conoinic gromth in I'Y06 reached a historic high o f 6.7 percent, reflecting strong growth in industry and agriculture. I lomestic dcmand and investment have remained buoyant. Exports and remittances have gro\vn strongly, contributing to a siirpliis i n the current account in FYO6. Iieserves incrcased slightly to $3.1 bi l l ion at cnd-June 3006 from their end-FYOS level o f$3 bi l l ion. By mid-March 9007. thew reached bnck to $-I bi l l ion even aftor ;in ACU payment o f$370 mil l ion. Monetary pol icy has responded priidcntl) to exchniigc rate Iluctuatioiis and inflationary prcssurcs. We have taltcn fiirther steps to strengtlicn the structure o f the economy and to improve economic governance. 'l'he steady and dotcrinincd pursuit o f reforms - - i n di f f ic i i l t domestic and external circumstances -. i s I i j i n g the basis for our longcr-term goal o f accelerating economic growth to reduce poverty more rapidly and improve tlne social conditions o f the poorest members o f our society, particularly in rural areas where most o f the population livcs. and especially for women.

53

Annex 5

c

1 .-I The Government prepared tlie national poverty reduction strategy, titled "Unlocking tlie Potential: National Stratcg) for Accelerated Povert! Reduction" (NSAPR), in consultation with all segments o f socict). -1 his I ctter o f L)c\clopmcnt Polic) l a j s out our achievements in the past year and Iiighliglits tlie he! icforiiis planned for the years ahead. for \chic11 \\e would seck continued bucigctary support froin tlie World Bank. Our reform prograin \vi11 cmphasiie prudent macrocconoinic policies and steady structural rcforins to improve t l ie climate I1)r privotc investinelit to create jobs, raise incomes and accelerate growth and pobert) reduction. V i e Govcrnment's o u n spending wi l l be based on a three-year Mediiiin Term Expenditure Plan, designed to translate the priorities o f tlie NSAPR into improved inli-astructiire provision and better services for the poor.

2. Nhinta in ing Macroeconomic Stability

2.1 From 6 percent in FY05, economic gro\\ t l i incrcascd to 6.7 percent in FY06. notwithstanding tlic impact o f higher oi l prices and increasing political confrontation in tlie run up to the political transition. Strong domestic and external demand encouraged rapid expansion in industrq. construction, services and exports. Demand pressures, gradual depreciation o f tl ic taka, rising prices o f imported food and the pass-through o f liiglicr world petroleum prices contributed to an incrcasc in inflation in FY06. Consumer prices were 7.2 percent higher in FY06 than a )ear earlier. Strong rise in external demand, coupled with tlie sharp rise in remittances and a sIoL\clocvn in import growth, led to an over $ 1 bil l ion turnaroufid in the current account balance, froin $ 5 1 8 million deficit in FY05 to $572 million surplus in FY06. Deficit in the financial account largely offset t l ie siirpILis. leading to a modest increase in foreign exchange reserves.

The Bangladeshi economy continlies to grow stronglq.

2.3 Responding to tlic dcinand and in tlntion pressures. I3angladesli Bank continued to gradually tighten monetary policy during 17Y06. Interest rates on treasury securities have increased by nearly 3 pcrccntagc points since t Y 0 5 and lending and deposit rates have increased by about 2 percentage points. llonevcr. private scctor credit growth s t i l l increased froin 17 percent in FY05 to 18.3 percent in FY06 and ttirthcr to 19.4 percent through December 2006. The taka, which eased against the dollar in early- 3005 and again in late-summer, depreciated by 9.2 percent in nominal terms in FY06 and fiirther by 2.7 percent through February 2007. Tighter monetary stance has been accompanied by prudent fiscal management. The overall fiscal deficit in FY06 was kept below t l ie budget target despite sizable revenue slippages. Revenue collections remained tinchanged at 10.5 percent o f GDP. Yet the overall budget deticit declined from 3.4 percent o f GDP in FY05 to 3.3 percent in FY06. However, net domestic linancing increased significantly from 1.7 percent o f GDP in FYO5 to 2.1 percent in FY06, reflecting shortfall in the inlloL\' ofestcrnal assistance and Linanticipiited financing for state-owned enterprises.

2.3 Economic performance has remained notably strong in the current fiscal year. Economic growth in I'Y07 i s likely to be around 6.5%. notwithstanding strikes and blockades and unfavorable neather conditions for tlic LIS and ainan rice crops. Growth this year is being drivcn by exports, which in tlie first seven months grew by 21% relative to the first seven months o f FY06; remittances, wliicli grew by 27% in the Iirst eight months relative to t l ie corresponding period o f FY06; and domestic private investments, as indicated by iiearly 21Y0 growth in LC settlements for capital machinery and 15% growth in LC settlements for machinery for miscellaneous industry in the first hall' o f FY07 relative to the first half o f I,'YOO. Credit to the private sector throttgli December 2006 g r w at an annualized rate o f 19%. Inflation, after reaching a six year high of7.2Y0 in I'Y06, appears to be moderating. The twelve-monthly moving- a\ clage inflation throiigh January 2007 edged down to 5.9%. coinpared with 7.1 % in January, 2006. t3aiigladcsli Bank's monetary policy wi l l remain cautious and restrained in order to counter inflationary press ti res.

2.4 Tlic tiscal stance remains prudent, altlioiigh revenue collections and external financing continue to fall short o f tlie target. The growth o f tax collection by the National Board o f Revenue (NBR) was

54

Annex 5

.-

9.5% in the first eight months o f FY07 rclative to the corresponding period o f FY06, largely due to a disinal 2.7% growth in foreign trade-based taxes. Non-NL3R taxes and non-tax revenues, however, have slio\\n faster growth than N U R taxes. We expect revenue collection to improve somewhat during the rest o f F'1'07. but i t wi l l most likely still remain w e l l below t l ie original budget target, which was rather over- ambitious by historical standards. Non-development expenditiires in the first half o f FY07 increased due to interest expenditure overshooting. carryover o f the Pay Commission award, and increase in teacher suhcntions froin 90%1 to 1 OO'XI. Annual Dcvelopnient Program (ADP) expenditure in tlie first seven inunths 01' 1:Y07 amounted to about 'fk 7-1.3 billion. compared \v i t l i 'T'k 81.8 billion in the first seven months ol'FYO6: c.spcniiiturc sl iarpl j dropped dtiring Novcmber-I)ccembcr 2006. The fund disbursement t'or lo \ \ priority politicall), motivated pro.jccts \vcre suspended. Notwithstanding revenue shortfall, we cspcct to contain [ l i e overiill FY07 budget deticit at around 4 percent o f GDP. Domestic financing would be contained at around 3, percent ofGU1' it ' t l ie proceeds from tl ie sale o f Riipali are realized and the DSC- IV and l<SDSC-lll disbursements take place this year.

3. St r uc t 11 r a 1 Rcl'or rns

3 . I ' I ' l ie present ("I'G has tbiyd ahead \vitli impleincnting ma.jor structural and institutional reforms t o siipport vibrant private sector grontli and for poverty reduction. 'r l lese reforms cover t l ic banking sect o r . s ta t e-o LL n cti c n t e r pr i s cs ( S 0 l i s ), t l ie en e rgy sect o r. t e 1 cco in in 11 n i cat i o n s , t l ie govern in en t ' s own l isca l operations. and broad-based governance measures. - --- L3ankinc sector Our ob.jective i s to strengthen thc banking sector so that financial resources can be interincdiatcd efticicntly and mobilized to creditworthy borrowers. and the country's savings can be used for productive investment. In particular. we have contintred the process o f reforming nationalized conimercial banks (NCBs). We are very close to completing the divestment o f 93 percent o f Government o\vncrship in t l ie Rupali Bank to a t'orcign 'strategic investor; tlie process i s expected to be coinpleted before end-April. 2007. A t the point o f sale. tlie government wi l l remove froin Rupali's books. and ;issLiinc t'iill rcspcinsihilit! for the liabilities of existing pensioners and for the accrued rights o f current cinplojecs. it11 cash piynictits l iom [lit Goccrnnicnt's budget as these payments beconic due. The govcrniiicnt u ill ;t lso issue bonds to Iltipnli to cover t l ie capital shortfall (bringing tl ie bank LIP to a zero capital position) and t i i ider-provis ioni i~~ in private loans in tl ie statutory accounts. A l l nonperforining S O L loans and other clearly dctined liabilities that are tlie responsibility o f the Government wi l l be replaced L\ ith a single loan lioin Il i ipali to the Govcrnment bearing the prevailing tive-year 'Treasury bond rate.

'I ' l ic government Iias also approved a draft regulation requikd to turn the Sonal i, Janata and Agrani banks into public limited coinpanics and bring thein under the Banking Company Act. The operations o f fliese h i k s \ \ i l l now be rim bq an autonomous board of directors and. for the first time. these banks wi l l fall LI n cI e r d i recti o i i s LI pc 1.v i s i on and rc ~ L I I at ion by 13 an g I ades 11 13 an li. 13 an g 1 ades 11 Bank con t i n 11 e s to in o n i t o r conipliancc ol'tlic NCRs with i t s Memornndum o f Understanding with cacl i NCB.

Bangladcsh Bank h a s inadc i t mandatory l iom January 2007 for all banks to have themselves credit rated by a Credit k i t i n g agency with a view to safeguard tl ie interest o f tlie prospective investors, depositors, creditors and the bank inanageinent as a \\hole. Banks have been advised to take neccssary ineastires so that the), can l i m e their credit ratings in all relevant areas a s well as tl ie bank management. Banks have bccn instructed to complete tlicir c r d i t rating by end-June. 2007. 'Hie credit rating wil l be updated aniitially. \,tithin sis months l'rom the date ot' c lose ot' cacl i financial year. The rating report w i l l be siibniittcd to I3anglodcsh 13an1, and macle public within onc month o f the notification o f rating by t l ie credit rating agcncj'. Banks 1% ill disclose tlicir credit ratings prominently in their published annual and 1ia1 I'! early statciiicnts.

55

Annex 5

.-

t'o\ver Sector .- Bangladcsli i s facing a power crisis. The installed capacity o f electric power i s about 5.350 MW, including 1.260 M W that is privately owned and operated. However, largely because o f tinrcliable state-owned poMer plants, it h a s been diflictilt to generate more than 3700 MW at any given t ime over the course oi't l ic last 18 niontlis. Meanuliile. peak dcmand is estimated to be about 5,000 M W . 'I'he country i s l ikely to face daily load sliedding o f 1200 to 1500 M W in tlie coining stiininer months.

l3angladcsli has tinderinvested i n generation and transmission, while expanding i t s distribution network in t i l t has been an impressive increase in customers --now estimated at about 8.5 inil l ion

countr>w ide. for a household connection rate of about 38% -but tl ie shortage o f generation i s now so severe that a moratoritini has been placed on new lines in rural areas , Furthermore, the country has often not invested in the right kind o f generation capacity--small gas-tired plants like Tongi, or small coal- burning units as at Uarapukuria, have been built for very high prices per installed kilowatt.

Restructuring the energy sector i s a high priority for thc government. Recognizing t l ie severity o f tlie problem. the government has initiated actions in the following arcas to address the problem over the short and medi uin-term:

Improving the management o f load shedding-Load shedding wi l l be a part o f tlie operational reality in Rangladcsli for some years to come: so an immediate concern i s to ensure that load shedding procedures are effective. Soltitions that can promote grid stability even in the face o f continued supply constraints are being devised and implemented. Better load management, involving short-terni steps to red~ice overall load, and to shift load, where possible, from peak to non-peak Iioiirs. are also being implemented. Recent Lip\vard l is ing o f power tariff i s also espected to discourage wastefill load.

Increasing collections and preventing clcctricitjr and gas thcft--Tlie government i s determined to improve t l ie siluation. during tl ie l as t three months an amount o f Tk. 3 8 1 crore has been collected, w h i c h i s Iiig1it.r b> fk. 80 crore than t l ie earlier three month period. During tl ie same time to prevent electr ic i ty leakage 60.01 2 illegal lines have been disconnected and Tk. 19,74,000 realised as penalty. 'l'he ongoing drive to increase collections froin private, public, and especially semi-autonomous custoiners wil l be sustained and deepened and disconnection o f illegal connections wi l l continue.

Con cl ii c t i n g r ii p i d xsscss m c n t of gene rii t i o n o pc r;i ti o n s, main t c n a n ce an tl r e h a b i li ta t i o n iss 11 es--- Options for a sustaincd turn-around in perforinance, focusing both on technical solutions (rehabilitation. operating procedures) and institutional ones (O&M contracts. public-private partnerships, etc.) are being considered. . a

Knsuring that the I3angladcsh Power Development Roard (BI'D13) and all GOB agencies are appropriately locusccl on ensuring smooth preparation and implementation o f the ADB, JljIC, and World 13ank Group generation investments. as this wi l l deliver around 2000 M W o f publicly tinanccd power generation by early next dccade. AI1 o f th i s capacity in terms o f location and technology i s justified in the least-cost plan.

Knsuring that the independent power producer (11'1') process i s prioritized. as i t i s uniquely positioned to & l i ve r ;i linanceable deal Ibr ne\\ baseload capacity. Iinpleinentation o f t l ie IPP process \ b i l l be carricti out \\ ith the help oi'rcputable intcrnational advisers.

&t I l ie Cliittagong Port. \+ l i ic I i handles 90 percent 01' k3angladesh's hreign trade, h a s not been able to keep up LZ it11 the rapid gro~cth oi'traiisport demand. causing congestions and delays at t l ie port, as well as high cos ts to port users. 7 l ie Loluine of'containcrs hnndlcd by the port Iias increased b j over 10 percent a year over the last decade and similar or faster growth i s projected for the foreseeable future Cliittagong Port lias not responded to th is demand grohtli efl'cctivcly. f h e delays and uncertainties in port services scriouslj Lindcrniinc the economj's productivity and international trading links. Improving both port

56

Annex 5

.-

operations and on\\ard inland transportation system is critical for improving the international c o t i i pc t i t i vc n es s o 1' t 1 I c I 3 11 n g 1 ad c 5 11 i cc o i i o my.

'l'lic Go\crnincnt. \villi support t ion i i t s development partners, lias invested substantially in the Cliittagong port to improve i ts performance. A note\corthy step has been the introduction o f the Automated System Ibr Customs Data (ASYCUDA t - I ), involving electronic processing and clearance o f cargo. A one-step services for clearing RMG export cargo was introduced at the Chittagong port to facilitate port and customs related paper\\~ork, shortening the t i ine taken for clearing exports and also improving tlie turn- around time Ibr ships. T h e CPA has recently procured ship-to-shore container gantry cranes for tlie existing dedicated container berths. The N e w Mooring Container 'l'erininal (NMCT), with a total length ol' I .000m berth length \\ ith 22 hectare backup facilities, t ias been completed with 100% financing by the government. On t.'ebriiary 18. 2007, t l ie gobernment decided to operate tl ie Chittagoiig NCT on Supply- Operate-l'ransfcr (SO'I ' ) basis by cspzrt operators o f international repute. The government wi l l not have to spend an! nioney on S O ' f . ' I ' l i i s decision L\ i l l be effective subject to vacating the court rule asking for maintaining t l ie status quo on the proposed SO'I'. 'fender wi l l be floated within thirty days after the vacation of ' the court ruling.

l7ic government also plans to construct a river-based inland container depot (ICD) at Pangaon, Dhaka, tinder ajoint venture of 13angladesli Inland Water Transportation Authority (BIWTA), Bangladesh Inland Water rraiisportation Corporation (BIW IC) and the Chittagong eoi-t Authority (CPA).

'l'hc ADI3-tinanced Chittagong Port ' l 'rade tacilitation l'ro,jcct i s tinder implementation. The project includes installation 0 1 ' comptitcrizcd container terminal inanageincnt system, upgrading o f existing MIS, and improvement o f environmental nianagcment capacity o f the CPA. Constriiction o f an access- controlled road for improving port access has already been completed under this project. T h e World Bank l ias had limited engngeiiicnt in the port sector in recent years. t lomevcr. a proposed Export Infrastructure L)e\clopincnt Project i s tinder preparation for IDA support for a new ICD near Dhaka. This would be supported by improvement in the railway connection along t l ie Dhaka--Chittagong corridor. under a joint prqiect between Cl'A and Bangladesh Railway (BR) and subject to a private sector operator o f the proposed ICD.

. ._ - I'ctrolciini __. - 'I'Iic increase in \\orid oil prices has posed a Iicnvy unanticipated extra burden on Bangladesh and tlic 1iii:inccs ot' t l ic I3anglaclesli t'ctrolctitn Corporation (13PC). In response to rising oil prices. the Govcrrimwt h i i s riiiscct clomcstic petrolctitn prices in a nuinbcr 01 ' incrcinental steps betu ecn July 2003 and June 1006. Very recently the Go\crnmcnt took steps for significant increase in the prices o f pctrolctiiii products. which shoitld stem the large losses atdhe BPC. On April 2, 2007, GOB announced a 21 percent increase in t l ie prices o f diesel arid Kerosene and a 16 percent increase in the prices o f octane and petrol. W e remain committed to ensuring that doincstic petroleum prices reflect the full cost o f imports in line mith tl ic lorintila agreed with I D A tinder DSC I.

hhttcai(is - Our natural gas rcsot~rccs need to be developed and used et'ficicntly. We remain committed to ensitring that doincst ic g a s prices are linked to intcrnational prices of'coinpeting fuels in line with the tbrtnula agreed w i t l i 1I)A. \ti. h a ~ e cotnplctcd the preparation ol 'a gas sector master plan.

Statc_-c)\\ ncd cntgiyciscs - l ' h e linancial pcrl'oriiiance o f SOEs deteriorated in FY06 c p i t l i aggrcgate losses ol'around 'fk 45 billion (equivalciit to 1 . I?'o ofGDt'). compared u i t h 0.8% in FY05. Energy sector SOEs were the main contributors. led by the BPC which accounted for over 80% o f the SOE.losses. The 13PlIl3, the Bangladesh Chemical Industries Corporation (BCIC) and Bangladesh Biinan, the national airlinc, also incurred signilicant losses. I.osses o f manufacluring SOEs were contained at less than Tk 4 billion. l ' h e 5% increase in po\\er tarift'tioin March I. 2007 is expected to increase BPDB reventies by 'I I\: 3.5 billion antitiall\.. 'I'hc go\ erninciit i s l'itrthcr considering non cash assumption o f 13PC's debt in

57

Annex 5

orclcr l o clear tip HIY.''s outstanding debts o f over 'l'k.100 bi l l ion to the NCUs. It bvi l l make necessary pro\ isioii in tl ic l'YO8 budget tbr the paynetit o f interest on these assumed debt. The BPC also owes $235 mi l l ion to the I s lam ic DeLelopiiicnt 13ank. lor \vliicli arrangements will be made by the government for payncn t .

I rade libcrali/.ation I:Y07 I3tidget p~is l ic t l the liontiers ol'tradc liberalization a notch further b!, reducing the avcragc iiominal protection li.oiii 26.5 percent in FY06 to 24.3 percent. * l 'h is ~ h a s done inainly by reducing the Supplcincntar\~ Duty (SI)) and. to a lesser extent, by lowering the customs duty (CD). Tl ie CD rates lbr intcrinediates and basic raw materials and capital machinery were scaled back from 13 and 6 percent. rcspccti\.cl\. to 12 percent and 5 percent. I,arlier i n 2005, bans on textile imports Lvere l i f ted and rcplaccd u i t h SDs o f 2 0 percent across the board, in addition to the highest protective CD o f 25 percent. 1 he SI) ratc on textiles has bccn l'iirthcr lowered to 15 percent. a sinall reduction, but nonetheless one that sends the incssage to the sector to shape tip in light o f greater competition.

4. Core G o v cr na n ce 1; LI n c t ions

'I'lic Go\ crnment has mode I'tirthcr efforts to strengthen core governance functions through improvements in the budget 1;)riniilntion process. public cspcnditiire planniiig and financial manageinent, public pi.octireincnt. monitoring, and accoiiiiling. I t i s also seeking to enhance revenue mobilization and the pcrt'ori11ance ot'thc KBR.

Rcventie Structural pi'oblciiis. such 21s ;I narrow tiis base. tax evasion, distrust o f the taxpayer toward public institutions. and administrative ckeahnesses. have had adverse impact on tax collection. Revenues tiwn tax and non-tax sotirces remain extrcincly .lo\\ in Bangladesh compared to other countries in South Asia and elsc\vlierc. l imi t ing the public sector's capacit!. to meet demands for healtli. education and infrastructure services. After a strong perl';)rinance in I'Y03, when tlic tax to CDP ratio rose by 0.6 percentage points in o w \car. that ratio 119s remained practically stagnant at around 8.5 percent tliroiigli FY06. I,ihe\\ isc. the o\cra l I revenue to Gl,)l' ratio. \vhich includzs non-tax revenue o f about 2 percent of Gl)l', has a l s o rcmaiiicd static L i t around 10.6 percent. There i s general conscnstis that the NBR, t l ie agency responsible t?)r most revenue collection. needs a major institutional overhaul to enable i t to mobilize rcveiiiie cffcct i \~ely and el7iciently. \vhile supporting the development o f an improved business climate arid public sector govcriiance.

With the government's endorscmcnt of' ;I Strategic Ikvelopment Plan for NBR. a multi-l.ear program i s ti ndc r\\.a> 1'0 r coin prch ens i c h ai gcs i n reven tic ad in in i s t rat i o t i . TI1 e p I an ai ins at i ncreas i n g reven tie collcctioii. cicvclopiiig a inore cl'li.cti\ c organi/ational stl.;ictiirc along functional lines. de\ eloping ~cgal and regtilatory s!steins to I l ic i l i ta tc ratl icr l l iai i liainpcr triide Ilo\\s, fostering a culttire oftaxpaycr service. and ensuring that 1111 businesses arc trcritcd t i i i i l i ) r in l~ and equitably. 'There are some positive developments in crcntiiig new functional responsibilities in the areas of audit. IiLiinan resources and ICT. l h e NBII i s being reorganized along liinclional lines. a model being pi loted at the t\co Large 'laxpayer Units ( V A T arid I i ico inc 'l'ax). A inr3jor pro-icct i s tinder preparation for comprehensive automation o f Nl j l l 's operations in all thrcc Las wings: IDA'S support w i l l be sought for this project.

Public cxpenditure __ We M.il l ensure that growth-enhancing and poverty-reducing spending is given 'pi'ioi.it!,. aiid that public sec tor \~; ige bi l ls arc contained. T l i e government continues to make efforts to root out uastcl'ul cspcndittircs and better p r i o r i t i x spcticling. We have stepped up otir efforts to st rcn gt l ie 11 p LI 11 I i c cspc i i cl i t ti re in an ngcincn t b l i in provi ng project scI cc t i on and exec titi oi l iinder t lie A D P. U'c rol lcd out the mcdiuin-term budget l'raine\\ork (M'l'Hk') to six inore l ine ministries in the FY07 budget and w i l l add foiir more in the FY08 budyet to bring tlie number o f ministries covered by the b1'1.131 to 14. We h;ivc instriictcd the IJlanning Ministry to tighten the scrutiny o f projects before placing them for the approval o f the Esccutivc Committee o f National Economic Counci l (ECNEC). We have

58

Annex 5 -

i i l s o asked the concerned ministry to rev iew the terms and conditions o f suppliers' credit. In view o f tlie revenue and foreign financing shortfall. \\e I iavc decided to prune the size o f FY07 ADP by at least Tk 40 billion- froin ' fh 260 billion to 'l'k 320 billion--by dropping the low priority prqjects. Ministries have also been instructed to design programs li)r the I,'YO8 b u d y t linked to achievement o f the longer-term goals ol'tlic NSAPII.

M'c have coinplctcd trac1,iiip studies 01' public spciiding on l ieal t l i and education with donors (IJK-DFID and the Nctliei~lancls) to ti') to ensure that spending rcachcs thc intcndcd recipients. These studies showed that \vliilc most spending \+[is reaching t l ie poor. t l iere was some evidence o f leakages and misinanagemetit. We arc acting to correct these.

t'roc ti re men t -- 13angl adcs 11 i s see n ;is II " s t iccess story " for i n t rod tic i n g s j .s tein i c p ti b I i c proc tire in en t reform. ' l ' l ie governincnt h a s established a I~rocurcmeiit Policy Unit, put in place a tiniforin procurement policy \v i l l i procedures applicablc for all public sector entit ia, introduced a performance tracking system, a n d dcvclopcci critical mass 01' procurement professionals. The Parliament approved in July 2006 a new t'iwiircincnt l ,a\\ , containing most features o f international good procurement practices with better competitiveness. transparency. efticicncy. and accotintability o f the system, with no restriction for participation in bidding. I'l ic development partners have laiidcd tl ie law and are increasingly harmonizing their act iv i t ies with the count1 procedures. An immediatc priority now is to iinpleinent tlie Law by dcveloping t l ie iinplcmcntation rilles and regulations. An IDA-ftmded second procurement reform project that i s tinder preparation ~ ~ o t i l d Iiclp introduce series o f measures incl~iding e-Government procurement, managcinent of' procurcincnt. and beha\ ioi'al change and social accountability.

Accoun,ti iig agd a~ic l i t i ng 'l ' l ic G o b cimiiicnt has strengthened pub1 i c linancial accounting with coin p ti t c ri /at i o n o I' 111 on t 11 1) ;icco ti nt s. s t rcn gt 11 e n i 11 g o f t 11 c Con t ro I I c r G en era1 o f Acco tin ts (C G A), appoiiitinciit ot'('liic1'Accotinting Officers to each ministi ncl thc separation of accounting and auditing bq placing the C G A uiidcr tlic Finance Division. instead o f t l ie Comptroller and Auditor General ((:&A(;), Otitstancliny atidit ob-jcctioris have been reduced. In t l ic year ahead. we will begin impleinenting our Public 1;inancial Management linproveinent Plan. We wi l l also publish qtiarterly procureincnt Managemcnt Information System results with performance indicators for key agencies in p o \ ~ c r and inli.astructurc. Fl'lic Cotincil 01' Advisors l i as recently approved in principle the draft Financial Reporting Ordinance to ensure accountability and transparent)' in tinancial reporting in piiblic interest en t i t i cs.

l'iiblic xiiniiiistration Tl ic Govcrnirieiit l i x a key role in, improving t l ic performance ofpiiblic oflicials. M'c havc accoidiiigl> gikcn grcatci. c~cigl i t to merit in the promotion o f senior officials. We adopted an improved training polic! in 2003. and made completion 01' training in core courses mandatory for pro in o t ion cons i deration s , We ;i re c o t i s id c r i n g lii rt lie r i n s t i t ti t i o n a I s t re n gt 11 e n i ng o f s ta f f t ra i n i n g. We a re creating clusters 0 1 ' ministries \vitli similar :irc;is o f interest and expertise, in order to encoilrage pro fcss i on i i I spec i a I i /at ion o 1' Ike! s ta l'f rotated bctu ecii t l iese in i n i s tries. We have i ntrod ticed legal rc'e1Liiiwiiciits niakiiig it mandntor> 1i)r civil scrbanrs t o submi t income tns returns and statements o f assets aiid liabilirics. and \kill contintic tu monitor and strcngtlicii coinpliance.

l~~i.~m~rp~J~cj institutions o f ac~) i intabi l i t j : . ' l ' l ie government recognizes tl ie need to improve p \ . c r i i a n c c i t c ross the board ~I i ro i ig l i \I iclc and spccilic nicasures. Poor governance manifests i t s e l f in pcrv'asiw corruption. poor s e n i c e clcliverq. ~ c e d \ : accountability and a crisis in citizens' cqfidence in t l ie state. A coiiccrtccl cl'lort to tacklc tl ie govcriiancc problems \\ill require reforming formal institutions, l a \ ~ s and processes and dcvclopincnt o f ~neclianisms for accountability throiigh civil society and the incclia. ' l ' l ic new C I ' G l i a s stnrted th is proccss, focusing first and I'oreniost on restructuring and streiigthcniiig o f t l ic ACC and separatiiig tl ie judiciary froin tl ie executive and strengtliening the 1'0 11 n tint i oi ls 1'0 r i t s i 11 d e pcnde ncc. ..

59

Annex 5 _.

..

: l / ~ / ; - ( 'orrup/iou ( ' o / ~ ~ / ~ ~ i s . s i o ~ ? (.4('(:') ' l 'hc government has recently reconstituted the Anti-Corruption Cominission. -l'Iie Commission h a s started i ts work \hit11 a big bang by publishing a list o f 5 0 high profile people ai id requiring them to submit their \vealtl i statements. I t i s inot,ing swiftly in scrutinizing these statements and filing corruption cases against the suspects. The CTG amended the Emergency Power Rules 2007 to empower the ACC to confiscate, through courts, movable and iiiimovable assets o f the l i s ted corrupt persons tvlio have failed to submit their uealtli statements. The actions o f the ACC have bccn vcrq i t e l l received hj, the general piiblic arid credibly signal that the government i s extremely seriotis about ailciressiiig corriiptinii. I ' l i c Government has also rat i l ied the United Nations Convention Against Corriiption (L!NCAC). I'liis i s oiil>, t l ic beginning. In the near and medium-term, the Government wil l IbctIS 0 1 1 :

Matching ACC's maiid:itc \\ ith fiindiiig We rccognix that a gross imbalance between ex-ante inandates and ex-post funding can result in failed expectations and damaged credibility. We bill thcrclbrc ensure a predictable and s i t I'licicnt level o f funding to enable the ACC to fulfill its mandates.

I b i s i n g the legal franic\vorli to strcngtlicn the ACC and corruption prevention inore generally. This \ \ i l l include provisions relating to money laundering; acts preparatory to corruption; provisions re I ;t t i ii: to i n t crii a t i o t i a I coo pcra t i 011 : 1 i na nc i a I i ns t i t ti t i o ns reg ti I at i o n, processes for assc t recovery and i t s rcltirii to its legitimate o\\ i icrs: incastires to provide protection to informants, witnesses, experts and their associates in relntion to corruption of'ttnces: and prevention incastires directed at both the piihlic and private sectors.

t'xploring. \\ithotit infringing upon the mandate and indeperidence o f the ACC, the possibility o f format i o i i o f an Adv i sorq C om in i t t ee coin pr i s i ng rep ti ta bl e re prcscii t at i ves fro in c i vi I soc i et y organizations and the piiblic at large to scrutinize the work of' the Commission and provide regular 1i.cdback on the Commissions \ ~ o r l \ and suggest possible avenues for improvement.

1:sainining the poasibilit> o1'establishing a C o d e of('oncluct idcntifying conflict o f interest and other niat tcrs that inaq arise arid pro\ icling ('ommissioiicrs arid other personnel with giiidance on hou. they arc to he rcsolh.cd.

Jm'icid Irit/tpe/7~/i'/7c'~. l ' l i c Gowrntiicnt recognizes the importance o f having an adequate ineastire o f independence of' the judiciarq, li.oni the executive and legislative branches. The CTG has already issued gazette notifications on the f'our judicial service rules and promulgated an ordinance on the ainendincnt o f Criminal Procedure Code (CrPC) as per the directive o f the Supreme Court. The Governrnent i s working on:

I-,'ast tracliiiig the separiition ot ' t l ic judiciary tiom the executive and to I'ocits efforts to professionalize tl ic se lcct ion ipromot io i i~s~~t ic t ions process for all judges.

Keconstituting the Judicial Service Coinmission and introducing a transparent process for recruitment ol'judgcs ot'stibortlinate Judicinrq based on coinpetencc and integrity.

1:stablisliing a sectire and sufiicient level o f budgetary funding that over time permits the judiciary to raise the compensat ion of judgcs aiid justices to lcvcls cotnincnsuratc with their staturk in society.

Ihisirig inlhriiinl prcsssurcs on the judiciary through mcdia scrutiny and piiblic discussion by aiiicnding tlic esistiiig co i i tc i i ip t I;t\\s.

Annex 5 -

4. I A National Stratcg!, Ibr Accelcratcd I'ovcrty IIcduction - "Unlocking t l ie Potential" was finalized in October 2005 al icr \\ idc consiiIt;itioiis \\ it11 difli'rent segments of society in every Division across tlie coiintry. as \ \ e l l as \\ it11 stakeholder groups including Members o f Parliaincnt from major parties. tlie business comniunity. NGOs and academics. ' h e present government bvill continue the process o f implcmcnting the PRS.

4.2 Bangladesh i s broadly "on track" in relation to a number o f t l ie Mi l lenn i i i i n Development Goals (MDGs). IntBnt mortality lias been fal l ing more rapidly than the trend rate required to meet the MDGs by 2015. Child niortality has bcen fal l ing at close to tlie required rate. Enrolment i n primary and secondary schools lias been increasing more quickly than tl ie required trend. 'The gender gap in primary and secondary school enrolinent has bcen virt i ial ly eliininatcd. Other gender inequities, however, continue, notably in maternal health, po l i t ica l representation and labor productivity. As a inark o f environmental progress. tree cover l i i is incrciiscd l iom 7 percent o f t l i c country in 1990 to 1 1 percent in 2000.

4.3 l l ' t l ic current <;Ill) gro~btli rate o t ' o w r 6 percent i s maintained, I3angladesli would be able to meet i t s MIX; o f reducing t l ie pow.t! rate to 79 percent bj . 2015. ' l l c recent progress towards tlie MDGs has bcen shared across regions and Iiouschold types. 711icrc appears to be a high degree o f social inequality. 'lhe gap between the poorest and tlic rest 01' society remains large. l ' l iese inequalities and tlie weak position ol ' thc poorest could cause divergence in meeting the MDGs. 1'liesc are substantial challenges and Lve sha l l seek the help o f our dcvclopincnt partners in meeting them.

L

1.4 IocLil go\crncincc. (1

nioiii lori ng.

'I he main priorities o f the NSAPI< arc ( i ) emplo!nicnt. ( i i ) nutrition. (iii) quality education, ( iv) niatcrnciI IicctItIi. ( c i ) sanitation and safe \cater, (v i i ) cr iminal justice and (v i i i )

4 . 5 The NSAI'K idcnt i f ics four major Stratcgic t3locl<s to achieve these goals. - Strategic Rlock 1 .- Pro-poor proL\tli Growth depends importantly on the rate o f growth o f the capital stock. T h i s requires raising tlie rate of investment. T h e Government i s determined to create a climate that i s friendly to private investment. l'liese include fiscal incentives, improved ta s ad in i i I i s t ra t io 11. in ak i n g I a I I il av a i I ab I e, fac i I i tat i n g wo in c n ' s entre p re n c ti rs ii i p and tl ie upgrxiing of technolog>.. cnhancing qualit) control. i inpro\ ' ing labor standards and supportive crcdit policies. l ' h c Go\ei.nii ici it i s a lso coininiltcii 10 removing obstaclcs. siich as lack o f reliable po\\ cr anLi gi is . poor transport. i nadcq ii;itc tclc~ommunications I l ic i I i ties, poor port f x i I itics,

mcnt. dcla!,s aiid corruption. \ccal\ Iaii and order sitiiation and frequent political agitatioii. l iaising the invcstinciit rote ILiIl have to be accompanied by higher savings by both the private and piiblic sectors. Invcsrmcnt prospects s l i o ~ i l d also bc improved through maintaining prudelit inacrocconomic policies, including raising tax rcvenues. improving the quality and ef'fcctivcness 01' public spending and opening tl ic economj through trade libcraliration and significantly reducing average protection. Reforins o f banking, state enterprises and energy should be coinplctcd. 'l'hc regulatory environinent. too, needs to continue to develop.

Jccclopmenr m u s t be the top priorities Ibr rapid povcrt! reduction. because three-quarters o f the population l ice in ri1r;iI ~irc;is and 85 pcrccnt of tl ic poor earn their l i v ing there. T h e Governinent aims to create an cnvironmciit in \v l i ic l i production ot'nili.ior crops i s intensified while other high val tic crops. sticli ;IS \ cgetablcs. t'ruits and Iiorticulture are encouraged. We also intend to encourage the emerging tlslicrics. potiltry and I i xs tock industries. Likewise we aim to encourage tl ic tbrcstry industry to increase timber siipplics and preserve biodiversity. (ii) Tlic Government has adopted a National Water f'olicy to ensiirc that t l ic country's water i s inanaged effectively. I'lood control i s ii priority. together 1% ith irrigation, drainage and the provision o f clean water. (iii)

0

0 Strgtcgic 13locl; 11.;- ('riticnl, Scctors for t.':o-l'oor rjc-qnoinic (>.p)yai - (i) Agricultiire and riiral

61

Annex 5

Small and inediuni enterprises play a key role i t1 eniploymeiit generation, and we intend to encourage their development tlirough a si inpl i l icd regulatorj, f rmework , improved market inli)imiation. a 1iasslc-Ii.cc tax s! s t e m anti appropriate credit facilities. ( iv) T h e informal sector, too. ofl'ers t l ic prospect o f rapid cniplo!,iiient creation and needs to be helped through adequate traiiiing. access t o in f i trtictiire and dcvclopincnt services. NGOs may have a key role to play Iicrc:. (v ) Good inl'rasti [tire i s criicial for fast economic growth. We intend to coinplete ongoing rel'orms in the po\\er sector. prepare a n action plan to address the financial problems o f tlie major poibcr utilities. priori t ize public in\,estment i n power and purchase power cost effectively from independent po\vcr producers. Gas i s a viil Liable resource, and \\e aim to iinprovc the performance 01' th is sector b j tiiibiinclling i t s parts. cstending the national grid and improving i ts finances. (vi) \$'e intend to improve the transpoi.t system, including a focus on maintaining existing roads better. reforming tlic railwa)'s. and cncouraging private participation in ports. (vi i) 'Tourism offers cinployincnt opportunities. centered on L3angladcsh's beaches, cultural spots and eco-sites, especially the Sundarlxins. (v i i i ) T h e Government recognizes that telecommunications and information technology are lil;cIj to be important fiitiire growth areas. It i s ciicouraging private participation i n tclecominiinicatiotis. the availabilitj, o f internet facilities in rural areas and the creation ol'a i ig l i - tech park. Strategic 131ocl\- 1 1 1 - Social Sati.1) Nets - 'I'lie NSAPIi aims to bui ld on the country's already robust port l i ) l io o f social sal'ct! net prograins \ k h i c h trai12ql'er rcsourccs in cash or Ikind directly to t l ic poor. I'Iicsc p r o p i n s targct ~ t ~ l r i c r ~ i l ~ l c groups. inclucliiig the poor. \\omen, disadvantaged groups iiiid old people. 'I ' l icy a l s o iiitn to he lp liccp childrcn in scliool, promote girls' education in

s. ciishion t i le poor against t l ie cl'fccts 01' natural disasters and provide shelter to the We intend to improve t h e targeting and widen the coverage o f these programs while

s tc in in i iig I eakagcs. St ratet ic -___.___ I3loc l i I V -.. I lu inan Dcvclopnient __- - W e intend to invest in people tlirotigh encouraging the provision o f high qiiality education. improved healthcare. better nutrition and clean water and snnit:itioii. We a i m to ciicotir-agc carl j education, especially in rural areas. in cooperation wi th \GOs. M'c aim to ensiirc that a l l cl i i ldren have access to pr i i i iaq schools and complete their pi.imary education. Wc arc Ibcuscd on improving the quality o f secondary education and the pro\ ision o f vociitioiial training. 'I l ie go\/ernancc. access and facilities o f tertiary education need to be i inprovcd Ivi t l i greater l'octis oi l professional degrees. In health, t l ie Government intends to cspand the provision o f essential ser\.ices, improve women's and inatcrnal healthcare, strengthen meastires to coinbat communicable diseases and raise awareness o f ineastires that people can take to reduce the risk ol'non-communicable discases. The Government aims to continue and enhance i t s nutrition pi'ograins. It i s also dc\,eloping a st.Tategy for clean icatcr and sanitation Lvithin i t s overall \ \atcr strategy.

5. I Monitor ing is pro.jectccl ;is one o l ' thc sti,atcgic agendas of t l ic NSAPR. became realization o f our poverty goals and incastiring t l ie cflkctivcricss of' our policies w i l l require carcfiil monitoring o f both proccsscs a i d outcoincs. In addit ion to tl ic nornxil data sources I'or tracking social progress, u'e intend to conduct special survej's u ith t l ie esprcss piirpose o f benchniarliing progress towards the MDGs. Monitoring and evaluation o f the NSAPIi \\il l require it vigilant institutional mechanism. The National Steering Coininittee. therefore, has been transformed into an Iinpleinentation Review Committee. which w i l l conduct a rcvieth annually. possibl!. ahead o f a meeting wi th donors. The HIES modtile tinder Hnnglndcsh ~3ureali 01' Statistics (1313s) will be supplemcntcd by an MLX attainment module. Iiidcpcndcnt resc;ircli institutes i i n d civ i l society can monitor progress towards the MDGs and give c rc i l i b i l i t ~ to the cwrc isc . A n Indcpcndciit Coiniiiittec i'or Monitoring and Evaluation o f PRS and Attainniciit o f MUGS has bccn constituted \ k i t h cniincnt incinbcrs froin c iv i l society for overall guidance and iinpleincntatioii monitor ing 01' the f ' l iS.

62

*. . Annex 5

6. Con c 1 us ion

6.1 Bangladesh has made good progress in implementing the broad range o f policies to improve growth and reduce p o ~ i - t y - despite domestic constraints and the iinfavorable impact o f high global commodity prices, espcciolly oil. We have benetited from the siipport o f our development partners, including the World Dank. W e havc laid out a challenging agenda for the medium-term, and the Government i s keenl). awarc 01’ thc hwv> responsibility that i t bears for pursuing reforms with strong determination for the bcnelit o f a l l our people. Further ad.iiistinent lending froin the International Development Association under Development Support Credit IV wi l l play a crucial role. We believe that this wil l cnhance our ability to meet our povcrty reduction goals and encourage the private sector growth which i s crLicia1 to creating employment and raising incomes o f the poor.

Sincerely,

Dr. A. B. Mirza Md . Aziziil Islam

63

Annex 6

Statement o f Loans and Credits

BANGLADESH Difference between expected and actual

disbursements Original Amount in US$ Mil l ions

Project ID F Y Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev’d

P100330 2007 BD Railway Reform Programmatic 0.00 40.00 0.00 0.00 0.00 40.29 0.00 0.00

PO98273 2006 Local Governance Support Project 0.00 111.50 0.00 0.00 0.00 112.33 -0.08 0.00 PO89382 2006 Investment Promotion Financing Facility 0.00 50.00 0.00 0.00 0.00 47.35 -1.25 0.00

DevPolicy

PO74841

PO86661

PO83890

2005

2004

2004

HNP Sector Program iBD - Water Supply Program Project

Economic Management T A Program (EMTAP) Reaching Out o f School Children Project

Enterprise Growth & Bank Modernization

Primary Education Development Program I1 Power Sector Development T A Social Investment Program Project

0.00

0.00

0.00

300.00

0.00

0.00

0.00

0.00

0.00

0.00 0.00

0.00

0.00 0.00 0.00

361.48

39.57

19.64

-56.05

0.77

8.74

0.00

0.00

0.00

PO86791

PO81969

PO74966

2004 2004

2004

0.00 0.00

0.00

0.00 250.00

150.00

0.00 0.00 0.00

0.00

0.00 0.00

0.00

0.00

0.00

43.19

140.99 99.36

3.65 50.42

2.92

0.00

0.00

0.00

PO78707

PO53578

2004

2003

0.00

0.00 7.10

18.24 0.00

0.00 0.00 0.00

0.00 0.00

13.86 5.63

9.77

3.60

1.93

0.00 PO71435 2003 Rural Transport Improvement Project 0.00 190.00 0.00 0.00 0.00 126.17 54.76 0.00 PO62916 2003 Central Bank Strengthening Project 0.00 37.00 0.00 0.00 0.00 36.37 32.50 0.00

PO81849 2003 BD: Telecommunications Technical 0.00 9.12 0.00 0.00 0.00 7.82 5.10 1.89

PO74731 2002 Financial Services for the Poorest 0.00 5.00 0.00 0.00 0.00 1.78 1.07 0.00

PO75016 2002 Public Procurement Reform Project 0.00 4.50 0.00 0.00 0.00 0.34 -0.35 -0.48

PO71794 2002 Rural Elect. Renewable Energy Dev. 0.00 190.98 0.00 0.00 0.00 91.16 46.91 0.00

PO44876 2002 Female Secondary School Assis. I1 0.00 120.90 0.00 0.00 31.06 25.11 38.32 -5.35

PO74040 2002 Renewable Energy Development 0.00 0.00 0.00 8.20 0.00 1.97 6.2 1 0.00

Assist.

PO69933 2001 HlV/AIDS Prevention 0.00 40.00 0.00 0.00 21.98 2.09 19.67 -0.33

PO57833 2001 A i r Quality Management Project 0.00 4.71 0.00 0.00 0.00 2.65 2.15 -0.54 PO50752 2001 Post-Literacy & Continuing Education 0.00 53.30 0.00 0.00 0.00 29.37 21.26 -1.74

PO44810 2001 Legal &Judicial Capacity Building 0.00 30.60 0.00 0.00 0.04 15.03 10.57 0.00

PO41887 1999 Municipal Services 0.00 138.60 0.00 0.00 0.68 36.88 34.08 22.36

Total: 0.00 1,751.55 0.00 8.20 53.76 1,300.43 294.74 17.74

64

Annex 6

Statement o f IFC’s Held and Disbursed Portfolio

In Mill ions o f U S Dollars

Committed Disbursed

IFC IFC

FY Approval Company Loan Equity Quasi Partic. Loan Equity Quasi Partic.

2001

1997

1991

2004

2006 1998

1998

1998

2000 2003

2000

BRAC Bank

DBH Dynamic Textile

GTFP Dhaka Bank

GTFP Eastern Bnk

GrameenPhone Ltd GrameenPhone Ltd

IPDC Khulna

Lafarge/Surma Lafarge/Surma

RAK Ceramics

United Leasing

Total portfolio:

0.00

1.91

0.00 5.00 2.59 24.00

59.00 3.13

10.40

35.00 0.00

7.20

2.57

1.63

0.65

0.00 0.00

0.00 0.00

0.00 0.00

0.00

10.00 0.00

0.00

0.00

0.00

0.00

0.00

0.00

0.00 0.00

0.00

0.00 0.00

0.00

0.00 0.00

0.00

0.00 0.00 1.60 0.00

0.00 1.91 0.65 0.00 1.48 0.00 0.00 0.00 0.00 5.00 0.00 0.00

0.00 2.59 0.00 0.00 0.00 24.00 0.00 0.00 0.00 0.00 0.00 0.00

0.00 3.13 0.00 0.00

11.99 10.40 0.00 0.00 0.00 35.00 10.00 0.00

15.00 0.00 0.00 0.00

0.00 7.20 0.00 0.00

0.00 2.57 0.00 0.00

0.00

0.00

1.48

0.00

0.00 0.00 0.00

0.00 1 1.99 0.00

15.00

0.00 0.00

150.80 12.28 0.00 28.47 91.80 12.25 0.00 28.47

Approvals Pending Commitment

FY Approval Company Loan Equity Quasi Partic.

2000 USPCL 0.00 0.00 0.00 0.00 1998 Khulna 0.00 0.00 0.00 0.00

Total pending commitment: 0.00 0.00 0.00 0.00

65

MAP SECTION

R A J S H A H IR A J S H A H I

D H A K AD H A K A

S Y L H E TS Y L H E T

K H U L N AK H U L N A

B A R I S A LB A R I S A L

C H I T TC H I T T A G O N GA G O N G

PPANCHAGARANCHAGAR

THAKURGAONTHAKURGAONNILPHAMARINILPHAMARI

LALMONIRHA

LALMONIRHATT

DINAJPURDINAJPUR

RANGPURRANGPURKURIGRAMKURIGRAM

GAIBANDHAGAIBANDHA

JOYPURHAJOYPURHATT

NAOGAONNAOGAON

NOWNOWABGANJABGANJ

RAJSHAHIRAJSHAHI

NANATORETORE

BOGRABOGRA

JAMALPURJAMALPUR

SERPURSERPUR

NETROKONANETROKONA

MYMENSINGHMYMENSINGH

TTANGAILANGAILSERAJGANJSERAJGANJ

PPABNAABNA

KUSHTIAKUSHTIA

MEHERPURMEHERPUR

CHUADANGACHUADANGA

JHENAIDAHJHENAIDAH MAGURAMAGURA

RAJBARIRAJBARI

FFARIDPURARIDPUR

MANIKGANJMANIKGANJ

DHAKADHAKA

GAZIPURGAZIPUR

KISHORGANJKISHORGANJHABIGANJHABIGANJ

SUNAMGANJSUNAMGANJ

SYLHETSYLHET

MOULMOULVI BAZARVI BAZAR

BRAHMANBRAHMANBARIABARIA

NARSINGDINARSINGDI

NARANARAYNGANJYNGANJ

MUNSHIGANJMUNSHIGANJ

SARIASARIATPURTPUR CHANDPURCHANDPUR

COMILLACOMILLA

MADARIPURMADARIPURGOPGOPALGANJALGANJ

NARAILNARAILJESSOREJESSORE

SASATKHIRATKHIRA

KHULNAKHULNA

BAGERHABAGERHATT

PEROJPURPEROJPUR

BARISALBARISAL

JHALUKAJHALUKATHITHI

PPAATUAKHALITUAKHALIBHOLABHOLA

BARGUNABARGUNA

LUXMIPURLUXMIPUR

NOAKHALINOAKHALI FENIFENI

KHA

GRA

CH

HA

RI

KHA

GRA

CH

HA

RI

RANGAMARANGAMATITI

CHITTCHITTAGONGAGONG

BANDARBANBANDARBAN

COXCOX’’SSBAZARBAZAR

RangpurRangpur

GaibandhaGaibandha

DinajpurDinajpur

BograBogra

SerajganjSerajganjNatoreNatore

JoypurhatJoypurhat

NaogaonNaogaon

NowabganjNowabganj

JamalpurJamalpurSerpurSerpur

NetrokonaNetrokona

SunamganjSunamganj

PabnaPabna

KushtiaKushtia

RajbariRajbariMeherpurMeherpur

ChuadangaChuadanga

JhenaidahJhenaidahMaguraMagura

NarailNarail

SatkhiraSatkhira

BagerhatBagerhat

PerojpurPerojpur

JhalukathiJhalukathi

GopalganjGopalganj

MadaripurMadaripurSariatpurSariatpur

FaridpurFaridpur

JessoreJessore

NoakhaliNoakhali

KhagrachhariKhagrachhari

PatuakhaliPatuakhali

BholaBhola

BargunaBarguna

ComillaComilla

Moulvi BazarMoulvi Bazar

MymensinghMymensingh

TTangailangail

ManikanjManikanj

RangamatiRangamati

BandarbanBandarban

Cox's BazarCox's Bazar

ThakurgaonThakurgaon

NilphamariNilphamari LalmonirhatLalmonirhat

KurigramKurigram

PanchagarPanchagar

FeniFeni

GazipurGazipurNarsingdiNarsingdi

NaraynganjNaraynganj

MunshiganjMunshiganj

ChandpurChandpur

LuxmipurLuxmipur

BrahmanbariaBrahmanbaria

HabiganjHabiganj

KishorganjKishorganj

RajshahiRajshahi

KhulnaKhulna

SylhetSylhet

BarisalBarisal

ChittagongChittagong

DHAKADHAKA

JJaammuunnaa

GGaannggeess

GGaannggeess

MMeegg

hhnnaa

KarKarnalinaliReserReservoirvoir

GG aa nn gg ee ss DD ee ll tt aa

SS uu nn dd aa rr bb aa nn ss

R A J S H A H I

D H A K A

S Y L H E T

K H U L N A

B A R I S A L

C H I T T A G O N G

PANCHAGAR

THAKURGAONNILPHAMARI

LALMONIRHAT

DINAJPUR

RANGPURKURIGRAM

GAIBANDHA

JOYPURHAT

NAOGAON

NOWABGANJ

RAJSHAHI

NATORE

BOGRA

JAMALPUR

SERPUR

NETROKONA

MYMENSINGH

TANGAILSERAJGANJ

PABNA

KUSHTIA

MEHERPUR

CHUADANGA

JHENAIDAH MAGURA

RAJBARI

FARIDPUR

MANIKGANJ

DHAKA

GAZIPUR

KISHORGANJHABIGANJ

SUNAMGANJ

SYLHET

MOULVI BAZAR

BRAHMANBARIA

NARSINGDI

NARAYNGANJ

MUNSHIGANJ

SARIATPUR CHANDPUR

COMILLA

MADARIPURGOPALGANJ

NARAILJESSORE

SATKHIRA

KHULNA

BAGERHAT

PEROJPUR

BARISAL

JHALUKATHI

PATUAKHALIBHOLA

BARGUNA

LUXMIPUR

NOAKHALI FENI

KHA

GRA

CH

HA

RI

RANGAMATI

CHITTAGONG

BANDARBAN

COX’SBAZAR

Rangpur

Gaibandha

Dinajpur

Bogra

SerajganjNatore

Joypurhat

Naogaon

Nowabganj

JamalpurSerpur

Netrokona

Sunamganj

Pabna

Kushtia

RajbariMeherpur

Chuadanga

JhenaidahMagura

Narail

Satkhira

Bagerhat

Perojpur

Jhalukathi

Gopalganj

MadaripurSariatpur

Faridpur

Jessore

Noakhali

Khagrachhari

Patuakhali

Bhola

Barguna

Comilla

Moulvi Bazar

Mymensingh

Tangail

Manikanj

Rangamati

Bandarban

Cox's Bazar

Thakurgaon

Nilphamari Lalmonirhat

Kurigram

Panchagar

Feni

GazipurNarsingdi

Naraynganj

Munshiganj

Chandpur

Luxmipur

Brahmanbaria

Habiganj

Kishorganj

Rajshahi

Khulna

Sylhet

Barisal

Chittagong

DHAKA

I N D I A

I N D I A

I N D I A

MYANMAR

BHUTAN

Jamuna

Ganges

Ganges

Meg

hna

KarnaliReservoir

B a y o f B e n g a l

M o u t h s o f t h e G a n g e s

To Dispur

To Dispur

To Dispur

To Silchar

To Goalpara

To Patna

To Katihar

To Katihar

To Gangtok

To Sittwe

To Calcutta

To Calcutta

G a n g e s D e l t a

S u n d a r b a n sMt. Mowdok

(957 m)

26°N

25°N

24°N

23°N

22°N

21°N

25°N

24°N

23°N

22°N

21°N

88°E 89°E 90°E 91°E

89°E 90°E 91°E 92°E

92°E

BANGLADESH

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other informationshown on this map do not imply, on the part of The World BankGroup, any judgment on the legal status of any territory, or anyendorsement or acceptance of such boundaries.

0 10 20 30 40

0 10 20 30 40 50 Miles

50 Kilometers

IBRD 33368

SEPTEMBER 2004

BANGLADESHDISTRICT CAPITALS

DIVISION CAPITALS

NATIONAL CAPITAL

RIVERS

MAIN ROADS

RAILROADS

DISTRICT BOUNDARIES

DIVISION BOUNDARIES

INTERNATIONAL BOUNDARIES