NOTE: External links to other Internet sites should not be construed as an endorsement of the views contained therein.
| The State Department web site below is a permanent electronic archive of information released prior to January 20, 2001. Please see www.state.gov for material released since President George W. Bush took office on that date. This site is not updated so external links may no longer function. Contact us with any questions about finding information. NOTE: External links to other Internet sites should not be construed as an endorsement of the views contained therein. |
|
FY 1999: Bangladesh |
II. ECONOMIC TRENDS AND OUTLOOKMajor Trends and Outlook
Bangladesh is a semitropical riverine nation with fertile soil and a high vulnerability to floods and cyclones. Most Bangladeshis live in rural areas and make their living from agriculture. With 127 million people crowded into an area the size of Wisconsin, Bangladesh has the highest population density of any country except city-states such as Singapore. Since independence in 1971, Bangladesh has been one of the world's poorest countries, although agricultural output has increased steadily over the nation's 27-year history since independence, and the country is nearly self-sufficient in food during normal years. The country historically has received annually the equivalent of close to 6% of GDP in foreign assistance disbursements, although this figure has declined to around 4% in recent years. Moderate economic growth continued for a second straight year in FY 98, following the return to relative political stability after democratic elections in June 1996. More dramatic growth levels, necessary to reduce the poverty which about one in three Bangladeshis endures, have not been reached. Relative political stability and strong growth in agricultural output boosted GDP by 5.9% in FY97. In FY98, however, growth slowed slightly to 5.6%, as agricultural production was lower; industrial output, although well up from FY97, was uneven across sectors. The government has yet to address major structural weaknesses of the economy which it inherited, mainly a weak financial sector and an unproductive public sector. Export growth, led by the garments and knitwear sectors, played a vital role in the recovery of the manufacturing sector during FY98. Industrial growth increased 8.1% during this period against 3.5% during FY97. Export earnings in FY98 were 15.7% higher than in FY97. Import growth has been sluggish the past two years, and imports grew by only 5% in FY98 and by a mere 3.4% in FY97. Interest rate hikes during FY98 and a tightened lending regime squeezed net credit expansion to the private sector. After remaining relatively low for most of the 90s, inflation was 7% for the year, led by increases in food prices because of the shortfall in the main rice crop. Strong growth in exports and the decline in imports led to a small surplus in the current account in the first half of FY98, but stronger import demand in the second half of the fiscal year pushed the current account into a deficit of about 1.5 percent GDP. As of October 1998, foreign exchange reserves were about $1.7 billion, which represents less than three months of import cover and leaves Bangladesh vulnerable to external shocks. The taka was devalued by a total of 6.1% in FY98 to contain import growth and assist exports. To date in FY 99, the taka has been devalued 4.8 percent. While the government did not meet its ambitious revenue targets for FY98, cuts in the Annual Development Program budget ensured that the fiscal deficit as a percentage of GDP fell from 4.4 percent in FY 97 to 4.2 percent in FY 98. The 1998 floods are expected to increase the budget deficit in FY 99 to 4.7 percent of GDP. On the revenue side, the floods decreased collections due to slower growth expectations and temporary collections difficulties; on the expenditure side, the floods induced higher food imports and infrastructure rehabilitation-related capital equipment imports. The government's continuing fiscal deficit has led to strong competition with the private sector for domestic financial resources and claims by some that the government is "crowding out" the private sector. The government increased its reliance on domestic sources for financing during the past two years by increasing its use of more expensive savings instruments, which are sold to the public at rates higher than those offered by banks. This has led to an increase in internal debt as a percentage of GDP from 8% in FY93 to 11% at the end of FY97. Domestic credit growth has slowed dramatically in the past two years, with many entrepreneurs complaining that capital has become too expensive under a new and more stringent lending regime. The government has stepped up its drive to recover overdue loans, which may be affecting perceptions of credit availability. However, the financial sector remained burdened by bad loans during FY98; some 35% of existing loans are nonperforming, amounting to approximately $ 3.4 billion. Capital markets remain weak after the stock market crash of late 1996, and are stuck at near all-time lows. The Awami League government is arriving at the midpoint of its five-year mandate without having made major changes to the structure of the economy. Economic growth has been respectable, inflation moderate, foreign currency reserves, although fragile, have stabilized and the country's medium term prospects are encouraging. In the oil and gas and energy sectors especially, international companies are beginning to deliver gas and power to the economy. The government continues to state its intention to open the economy further and improve the investment climate for foreign investors. However, implementation of pro-private sector policies in some sectors is lacking. The government is making progress in gas and energy, but not at a fast enough rate to keep pace with economic growth and the pressing needs of society. A deteriorating power supply situation hampers industrial growth and frustrates the populace. Some prospective foreign investors have been either confused or discouraged by a seeming indifference toward the private sector on the ground, where bureaucratic delays and inconsistencies with policy pronouncements are common. Nonetheless, those businesspeople (domestic and foreign) willing to invest for the long term continue to find Bangladesh a profitable place to invest. To a large extent, all major political parties publicly support pro-private sector economic reforms. In the summer of 1998 Bangladesh endured the worst floods of its history. While evaluation teams of the Government and international donors are still completing their surveys, the economic damage could reach $1 billion. A large percentage of the winter rice crop could not be planted, and instead the country faces an increased food import bill of several hundred million dollars, despite the assistance of donor nations, such as the United States, which has pledged to donate 700,000 metric tons (MT) of wheat. To help strengthen foreign currency reserves from expected draw downs for food and capital equipment to repair and replace damaged infrastructure, in the Government asked for and received emergency balance of payments loans from the IMF and World Bank amounting to several hundred million dollars. Bangladesh has also indicated its willingness to negotiate an Enhanced Structural Adjustment Facility (ESAF) with the IMF; negotiations are expected in early 1999. In October 1998 the country's currency, the taka, was devalued by nearly 3%, the largest single devaluation in years. The Government also raised some taxes and increased some supplemental duties to help offset the increased spending for flood relief and reconstruction. It also is attempting to redirect some of its lower-priority capital spending towards flood relief, and has announced restrictions on some current spending. Despite the severity of the flooding and the hardships it caused for millions of people, the economy nonetheless endured, and the Bangladeshi people responded with a remarkable perseverance. Despite disupted supply lines to the major port, Chittagong, garment exporters were able to meet nearly all of their orders and expect to maintain growth levels for the year. The military took over the operation of some activities at the ports to increase productivity, and the government waived some charges for imports to help the export sector cope. As of late October 1998, sufficient food supplies existed in country, and orders had been placed for additional rice to replace the shortfall in the upcoming winter harvest. The Government has enlarged its feeding program to try to help the country's poorest citizens receive at least some food. Principal Growth Sectors Agriculture: Agriculture accounts for about 35% of GDP, down from 40% in the eighties, and is the primary occupation of about 70% of the population, mostly farmers or rural laborers. Growth in agricultural production decelerated from 6.4% in FY97 to 3.1% in FY98. The major contributor to the agriculture sector is crop production, which is overwhelmingly dominated by rice. The crop sector managed only a meager 1.0% growth in FY98. Non-crop agriculture like fisheries, livestock and forestry performed better in FY98 and partly offset the crop sector's low growth. FY98 food grain production showed a marginal 1.0% increase primarily because rice production declined by 0.5%. Wheat production was a bright spot in an otherwise dismal picture, showing a robust 24% growth rate. With a total production of 18.744 million metric tons (MMT) of rice and 1.8 MMT of wheat, the country's food grain deficit increased. This required an enhanced level of commercial imports, mostly by the private sector, which reached an estimated 1.05 MMT of rice and 123,000 MT of wheat in FY98. Bangladesh had no concessional rice imports during FY98, and received 541,316 MT of concessional wheat imports. Given a population growth rate of 1.8% and limited opportunities for expanding planting areas, Bangladesh may continue to be a regular importer of food grains (rice and wheat) in the coming years. The volume of imports is likely to depend on the vagaries of nature, which the summer 1998 floods displayed powerfully. The pre-flood forecast by the USDA for food grain imports in FY99 was 350,000 MT of rice (all commercial) and 1.35 MMT of wheat (850,000 MT commercial/500,000 MT concessional). The post-flood estimate of Bangladesh's FY 99 food grain shortfall is 4.2 mmt. Jute, the "golden fiber" of Bengal, is Bangladesh's main cash crop, cultivated in rotation with rice. Although Bangladesh is still the world's leading jute exporter, the fiber's prominence has slipped in recent years as world demand for jute products such as carpet backing and burlap bags has stagnated or fallen. Inefficiency caused by heavy government involvement in procurement and processing has also hurt the sector. The public sector jute industry incurred a loss of $58 million in FY97 and an estimated loss of $48 million in FY98. The government has introduced an export bonus to encourage jute sales by the public and private sector. Jute production in FY98 increased to 883,000 MT from a level of 739,000 MT in FY97. This is still only half the level of jute production during the sector's heyday in the late sixties. Farmers are growing increasingly uninterested in the crop due to the continued supply glut and corresponding low prices in recent years. The combined total export earnings of jute and jute products typically represent 10-12% of the country's export earnings. In FY97 export earnings from the sector rose by 3.5% to $434 million. Industry: Industry (manufacturing, construction, power, and utilities) accounts for about 20% of Bangladesh's real GDP. The state owns 40% of industrial capacity, primarily in jute, textile milling, steel, and chemicals. Gross losses of nonfinancial state-owned enterprises cost the government about $ 364 million in FY97, the equivalent of 1.2 percent of GDP. To date, the current government, as the one before it, has made little progress in reducing these losses through privatization or increased productivity. Since June 1996, the Privatization Board has managed to hand over to the private sector only 5 small enterprises out of the 32 firms slated for sale. The Privatization Board is hindered in its work by its lack of legal authority and by substantial opposition to privatization by labor unions and the public in general. It recently launched a publicity campaign to raise awareness of the losses that state owned enterprises incur; that campaign however was quickly suspended after the labor unions objected. The private sector still struggles with power outages, overregulation, inadequate commercial laws, labor and political strikes, and other factors which inhibit investment. All these factors keep Bangladesh from reaching the 7% sustained annual economic growth rate experts deem necessary to lift it out of poverty. Despite such impediments, overall industrial production grew at about 8.1% in FY98, up from 3.5% in FY97. Manufacturing growth showed a steady acceleration during this period, led by the export-oriented garments and knitwear industry. Tea, cigarettes, soft drinks, cement and iron and steel also did particularly well. The growth in manufacturing was uneven across sectors, however, with important industries such as leather tanning and footwear, fertilizer, pharmaceuticals, paper, and seafood all registering significant declines. Industrial growth in FY99 will depend on the availability of both steady electricity supplies and financing, chronic problems facing industry. One bright spot for industrial growth will be the increased foreign investment in oil/gas exploration, as reforms in the oil and gas sector are yielding results. The Scottish firm Cairn Energy (which has Halliburton (U.S.) and Royal Dutch Shell as partners in the Sangu project) started delivering gas to the government in June 1998 under its production sharing contract. Occidental Petroleum has drilled in several areas and should deliver its first gas by early 1999. As a result of these finds and the belief that the country maintains extensive natural gas reserves, major oil and gas companies placed bids in the July 1997 second round of hydrocarbons blocks by the government. The government announced some winners of blocks in late July 1998, but postponed the award of those blocks most sought by international oil companies. Negotiations designed to complete the bid round are expected soon. In the power sector, reform has led to the signing of a 22-year power purchase agreement with AES Transpower to construct a 360 megawatt (MW) gas-fueled power plant at Haripur, close to Dhaka. AES also was the low bidder on a 450 MW power plant at Meghnaghat; negotiations are ongoing as of November 1998. Negotiations are continuing with several companies to provide barge mounted power plants; one such plant, majority-owned by Coastal Power of the U.S. with the World Bank's IFC as a minority partner, was commissioned in September 1998 and now provides approximately 110 MW of power in Khulna, in western Bangladesh. The international financial institutions also are supporting power sector development. As gas and power shortages curtailed economic activity in FY98, these steps by the government are extremely positive and important for future economic growth. In the telecommunications sector, there are seven private firms which are either operating or have permission to provide telecommunications services, primarily cellular services, and rural basic services. Government Role in the Economy Bangladesh's industrial development has been hampered by a history of government intervention in trade and industry. Although over the past seven years the Bangladesh government has enacted policies to diminish bureaucratic requirements and open the economy to private sector development, these efforts at market-based reforms have only been partly successful. Trade has been liberalized and new sectors opened to private sector development; other reforms have also improved the business climate. However, many other reforms, such as privatization, encounter stiff opposition from vested interest groups, such as public sector labor unions, bureaucrats or opposition political parties. To date Bangladesh's government has found this opposition difficult to overcome, and implementation of policy reforms has often been lacking. According to the World Bank, the state-owned enterprises (SOEs) accounted for over 25 percent of total fixed capital formation, but only 6% of GDP. Sizeable SOE losses continue to burden the budget and their inefficiency is a major drag on the economy. In a poor country like Bangladesh, the opportunity cost of the SOE losses is acute, as social sectors like health and education lack sufficient resources. The public sector exercises a dominant influence in many prominent industries, for example, jute, textiles, steel and chemical production, and sugar. Most public sector industries, especially textiles, jute processing, and sugar processing, are perennial money losers. These units drain the government's treasury and set high wages that their private sector counterparts often feel compelled to meet out of fear of union action. Also, crucial non-manufacturing industries--power, telecommunications, railroads, and the national airline--are still largely inefficient public sector monopolies, which limit private sector productivity and growth. The opening up of the oil and gas, power, and telecommunications (cellular and rural areas) portfolios to the private sector is a welcome step in the right direction. Balance of Payments Situation Exports: Bangladesh's exports are heavily concentrated in garments and, more recently, knitwear. The country began exporting garments only in the early 1980s, but growth in the industry since that time has been phenomenal due to the system of bilateral quotas with developed country markets which limit the exports of many competing Asian suppliers. Another key to the success of garment exports is a relatively light load of government regulations, the provision of customs bonded warehouses for imported cloth, and financial arrangements (back-to-back letters of credit) which enabled foreign banks to finance raw material inventories. Total merchandise export earnings in FY98 grew by 15.6%, an impressive performance on top of the 14% increase in FY97. Total export revenues in FY98 came to $ 5.1 billion (preliminary data). Export outlook: Export growth in FY99 will likely be mixed. Garments and knitwear exports should remain strong. But reduced demand in importing countries for other products, such as leather goods, shrimp and jute, will hurt those sectors. Imports: In FY98 imports grew by 5%, after increasing by only 3.4% in FY97; in contrast, imports grew by 16.6% in FY96. Commodity imports fell in FY98, while intermediate goods increased slightly; consumer goods imports were nearly identical, while capital machinery imports grew by over 16 percent. By all accounts, unofficial imports, basically border trade with India, have continued to increase. The taka was devalued in several increments by a total of 6.1% in FY98, to spur further reductions in imports and boost exports. U.S. - Bangladesh Trade: The U.S. had a trade deficit with Bangladesh which reached $1.42 billion in calendar year 1997. The previous year's deficit was $932 million. Bangladesh's garment trade is the primary reason for the deficit. In 1997, according to the U.S. Department of Commerce, U.S. imports from Bangladesh reached $1.679 billion, up 25% from the previous year. Garments increased by 28 percent to $1.025 billion, while knitwear increased 37%, to 306 million. U.S. exports to Bangladesh, meanwhile, increased 23% in 1997, to $259 million; exports figures for calendar year 1998, January-August, show exports from the U.S. up by about 3 percent, while Bangladeshi exports to the U.S. are up by close to 26 percent. Outlook for U.S. Imports from Bangladesh: U.S. imports of garments and knitwear have recovered from supply disruptions due to political strife early in 1996. The long-term outlook of the industry is less clear, as the quota system under the Uruguay Round Agreement on Textiles and Clothing phases out over the next 6 years. Much will depend on whether Bangladesh can make improvements in finance, customs, port and transportation systems, as well as in its domestic textile sector (most fabric for the industry is now imported). U.S. exports to Bangladesh: U.S. exports increased by 23% in calendar year 1997 to $259 million from $210 million in 1996. Cotton and wheat remain the top two exports. Computers, soybean oil, and a variety of oil drilling equipment also were important contributors. Outlook for U.S. exports: If industry continues to expand, U.S. exports will continue to grow, as U.S. products and commodities have an excellent reputation in Bangladesh. Exports of cotton and wheat, industrial power generators, and computers should increase. Textile machinery--new and used--could also increase if purchasers can overcome financing difficulties. Current Account: The current account deficit was approximately 1.5% of GDP in FY98; imports were sluggish and but so was growth in remittances from Bangladeshi workers abroad. In FY98, aid disbursements decreased slightly, to $1.419 billion, down from $1.481 billion in FY97. Hard currency remittances from Bangladeshi workers, principally in the Middle East, while down by 3.5% from FY97 levels, are still an important element in the country's balance of payments, and exceeded aid disbursements. The country's currency, the taka, continued to be devalued in FY98, by a total of 6.1 percent over the year. The exchange rate at the end of October 1998 was 48.7 taka to the dollar. The average annual exchange rate was 40.84 taka per dollar in FY 96, 42.70 taka in FY 97, and 44.7 TK in FY98. The Bangladesh Bank follows a semi-flexible exchange rate policy of valuing the currency on the basis of the real effective exchange rate, taking account of the nominal exchange rates and inflation rates of major trading partners. Reserves at the end of October 1998 totaled $1.7 billion. The taka's market value has been bolstered by the large sums of foreign exchange Bangladesh receives every year through aid transfers and through remittances. Despite the devaluations, the real exchange rate for the taka appreciated by around 8% during FY98. The taka is now almost fully convertible on the current account but capital account convertibility, although promised for some time, has not yet happened. In light of the problems attributed to capital account convertibility by countries in southeast Asia, it appears unlikely that Bangladesh authorities will make changes soon. Assessed on the basis of outstanding principal, Bangladesh's external debt was projected at $ 15.855 billion at the end of 1997. Because virtually all of the country's outstanding external debt has been granted on highly concessionary terms (e.g., one or two percent interest, 40-year maturity, and a 10-year grace period) by donor nations and multilateral lending institutions, the net present value of the debt is far lower than the face value. As of year-end 1998, the outstanding balance of Bangladesh's PL-480 debt to the U.S. is $497 million. Domestic debt has been growing moderately, from 8% of GDP in FY93 to almost 12% in FY97. Infrastructure Bangladesh's two major seaports, Chittagong and Mongla, handled 13.7 million metric tons of cargo in FY98. Chittagong, by far the larger port, with two container terminals, handled 11.05 million metric tons of cargo in FY98. The Chittagong port suffers from inefficient space management and a shortage of handling equipment which causes serious delays and traffic congestion. Periodic general strikes by port workers culminated in a politically-motivated month-long shutdown of Chittagong port in March 1996. The port has been closed at times by workers for various reasons, usually relating to benefits. The current port container storage area continues to be stocked with significantly more containers than its 8,500 container design capacity. In FY98 the BDG approved a private container project worth approximately $440 million proposed by a U.S. company, Stevedoring Services of America (SSA). SSA's project would include the construction of two container ports, one in Dhaka and one in Chittagong. The 36,000-kilometer primary road network is in relatively good condition (although it did receive extensive damage in some regions due to the floods of summer 1998), giving rise to a substantial private trucking industry. The Jamuna Multipurpose Bridge, a mammoth engineering and construction project which spans the Jamuna river, connecting east and west Bangladesh for the first time, was completed in June 1998. Inland waterways are extensive. Inland water transportation accounts for about 65% of domestic cargo transportation and about 38% of inter-district passenger traffic, despite seasonal siltation problems and inadequate inland port facilities. Bangladesh's 4,364-kilometer railway system is in poor condition, hobbled by a mix of track gauges, widespread ticketless travel, and aged equipment. The Bangladeshi government is modernizing Dhaka airport and plans to expand Chittagong and Sylhet airports. Government-operated Bangladesh Biman Airlines runs a fleet of 9 aircraft, and some 17 airlines connect Dhaka with the Europe, the Persian Gulf, and South, Southeast, and East Asia. Bangladesh saw two new domestic private airlines enter the market in FY98, GMG and Air Parabat. Another private airline, Aero Bengal, went out of business in FY98. As of the end of October 1998, Air Parabat had suspended operations because of the technical problems with its Czech aircraft. Other private companies have also been entering the market for helicopter services and for domestic and international cargo service. Air cargo volumes, while still small, have been growing steadily over the last few years. Bangladesh's public power sector is inadequate and rife with corruption. Between 30 and 40 percent of electricity distributed to urban areas is never paid for. Overloading and a lack of maintenance cause frequent outages. Necessary planned blackouts, called "loadshedding," are common occurrences throughout the country. Damaged equipment, investments in standby generators, and lost production time caused by power irregularities and failures have cost some firms up to 30% of their value of production. The government has signed three agreements with private companies (two from the U.S.) to purchase electricity from power barges over 15 years; the first barge began delivering 110 MW of power to Khulna (in the western region) in September 1998. As of October 1998, a U.S. company, AES, had signed one contract with the government for a 360 MW land-based combined cycle power project in Haripur, and was negotiating another, of 450 MW, in Meghnaghat. UK-based MPI, a subsidiary of Cinergy (US), was the low bidder on a planned 100 MW power plant in Bagabhari, in the western region, and signed a letter of intent with the Government in the fall of 1998. The country's telecommunications services are inadequate. The government-run telephone service has approximately 450,000 lines to serve 125 million people and a call connection rate of 30%. About 60% of the lines are analog and the quality of service is poor. The telephone service company is undermined by widespread corruption. Efforts are slowly under way to upgrade the telephone system, including expanding domestic and international capacity and installing digital exchanges. More private telecommunications firms entered the cellular telephone market in FY97; three companies now are operating with a fourth having a license. Combined subscribers total 52,000. Several Internet service providers, featuring electronic mail and World Wide Web services, now exist in Dhaka.[end of document]
Note* International Copyright, United States Government, 1998 (or other year of first publication). All rights under foreign copyright laws are reserved. All portions of this publication are protected against any type or form of reproduction, communications to the public and the preparation of adaptations, arrangement and alterations outside the United States. U. S. copyright is not asserted under the U.S. Copyright Law, Title 17, United States Code.