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Analytical Review of Bangladesh’s
Macroeconomic Performance
in Fiscal Year 2011-12
(Third Reading)
04 June 2012
CONTENTS
Introduction
The Macroeconomic Scenario
Investment Situation
On Crop Production and Food Security
Employment Generation
Review of Policy and Reform Initiatives
Analytical Review of Bangladesh’s Macroeconomic Performance in FY2011-12: Third Reading
2
IRBD FY2011-12 Team
Debapriya Bhattacharya
Mustafizur Rahman
Fahmida Khatun
Khondaker Golam Moazzem
Md. Ashiq Iqbal
Towfiqul Islam Khan
Nafisa Khaled
Hasanuzzaman
Kishore Kumer Basak
Mazbahul Golam Ahamad
Md. Zafar Sadique
Mehruna Islam Chowdhury
Mashfique Ibne Akbar
Meherun Nesa
Shameema Nasreen Ahsan Mallik
Marziana Mahfuz Nandita
Nepoleon Dewan
Nusrat Jahan Tania
Saifa Raz
Samina Hossain
Dwitiya Jawher Neethi
Shouro Dasgupta
A H M Ashrafuzzaman
Md. Hamidul Hoque Mondal
Analytical Review of Bangladesh’s Macroeconomic Performance in FY2011-12: Third Reading
3
Acknowledgment
The team would like to appreciate the valuable support it has received in
accessing relevant data and information from concerned officials belonging to a
number of institutions including
Bangladesh Bank,
Bangladesh Bureau of Statistics (BBS),
Bangladesh Energy Regulatory Commission (BERC),
Bangladesh Export Processing Zones Authority (BEPZA),
Bangladesh Power Development Board (BPDB),
Bureau of Manpower, Employment and Training (BMET),
Chittagong Port Authority,
Department of Agricultural Extension (DAE),
Dhaka Stock Exchange (DSE),
Export Promotion Bureau (EPB),
Ministry of Commerce (MoC),
Ministry of Finance (MoF),
National Board of Revenue (NBR),
Petrobangla,
Power Cell,
Planning Commission and,
Roads and Highways Department (RHD)
Analytical Review of Bangladesh’s Macroeconomic Performance in FY2011-12: Third Reading
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Expert Group
The CPD team is grateful to all of those presented at the consultation for sharing
their views, insights and comments on the draft report. A list of the participants
of the meeting is provided below (in alphabetical order)
Dr Shamsul Alam
Dr Mahabub Hossain
Dr Akbar Ali Khan
Dr Ahsan Habib Mansur
Dr Rushidan Islam Rahman
Dr Hassan Zaman
Member, General Economics Division (GED)
Planning Commission
Government of Bangladesh
Executive Director
BRAC
Former Chairman
Regulatory Reforms Commission (RRC) and
Former Advisor to the Caretaker Government
Executive Director
Policy Research Institute of Bangladesh (PRI)
Research Director
Bangladesh Institute of Development Studies
(BIDS)
Senior Economic Adviser to the Governor
Bangladesh Bank
Analytical Review of Bangladesh’s Macroeconomic Performance in FY2011-12: Third Reading
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INTRODUCTION
1. INTRODUCTION
Throughout FY12, issues relating to quality of macroeconomic management,
particularly questions relating to government borrowing, foreign aid utilization,
implementation of the annual development programme (ADP) and revenue
generation figured prominently in the economic discourse.
Extreme volatility in the capital market;
 High level of consumer prices;
 The sorry state of infrastructures – transport and communication as well as
gas and electricity supplies;
 Reluctance of the World Bank to disburse funds for the Padma Bridge;
 The Indo-Bangla transit controversy;
 Fallouts of the euro zone crisis.
Indeed, new dimensions were added to economic management as the
government contracted a loan under a IMF programme towards the end of the
year.

Analytical Review of Bangladesh’s Macroeconomic Performance in FY2011-12: Third Reading
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1. INTRODUCTION
CPD, in its first reading of the state of Bangladesh economy carried out under its
Independent Review of Bangladesh’s Development (IRBD) programme, released on 3
November 2011, highlighted the following four critical concerns for FY12.
Implications of the new wave of global economic crisis
 Deepening stresses in public finance management
 Unabated price inflation
 Increasing pressure on the balance of payments (BoP)
The evolving state of the economy during FY12 was captured by the second
reading of economic development in FY12 under the IRBD, which was published
on 11 March 2012. This review emphasised the following five areas of concern:

Adverse spillovers from the uncertainties in the global markets
 Public finance emerging on the weakest link of macroeconomic management
 Monetary policy slowly going off the track
 The trust deficit underpinning the capital market stabilisation
 The balance of payment increasingly coming under seize
Thus, the present review, which is the third and last reading of the state of the
economy in the current fiscal year, while puts it focus on its defined scope, but
also needs to be looked at as a product in a continuum.

Analytical Review of Bangladesh’s Macroeconomic Performance in FY2011-12: Third Reading
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1. INTRODUCTION
The present volume addresses in its section on macroeconomic performance a
number of important issues along with the necessary updates.
However, the main value of the present volume lies in three other core sections
which discuss three themes of key importance for the Bangladesh economy at
this present juncture: namely investment, employment and reforms.
Admittedly, a stagnating, if not faltering, investment, is holding back the
economy from achieving higher levels of economic growth.
Basic objective of all public policy is generating additional gainful employment
opportunities but there is hardly any evidence-based real time picture of this that
is available for scrutiny.
The review of the reform initiatives of the present government has been
undertaken to deepen our understanding about the institutional impediments to
accelerating economic growth.
The present review also contains a note on the state of crop production and its
implications for food security.
Indeed, as the incumbent government finishes the third year of its tenure, the
present review intends to highlight the goalposts of the bigger picture of the
economic canvass.
Analytical Review of Bangladesh’s Macroeconomic Performance in FY2011-12: Third Reading
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THE
MACROECONOMIC
SCENARIO
2.1 ECONOMIC GROWTH SLOWS DOWN
BBS indicated that GDP growth target of 7.0% will not be met in FY12
6.3% i.e. 0.7 percentage point lower than its target
A setback for government’s plan to move towards a higher growth trajectory

Propelling Bangladesh to a higher growth trajectory would definitely require
much more in the areas of inter alia, economic reforms along with better
investment in physical infrastructure and human capital formation
Per capita GNI also increased to USD 848 in FY12 (i.e. USD 32 increase)

Indeed, a faster depreciation of Taka against USD (by 9.9%) restricted growth of
per capita income in USD terms in FY12
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2.1 ECONOMIC GROWTH SLOWS DOWN
Sources of Growth: Agriculture Holds Back
Of 6.3% of overall growth in FY12 Agriculture - 0.5% (1.0% in FY11)
 Crop – 0.1% (0.5% in FY11)
 Fall of agriculture’s contribution (0.5%) is more than overall fall in GDP
growth (0.4%)
Industry- 2.8% (2.4% in FY11) – highest in history!
Service – 2.9% (3.0% in FY11)
Import duty – 0.1% (0.3% in FY11)
CONTRIBUTION TO GROWTH (%)
Sector
Agriculture Sector
Crops
Industry Sector
Manufacturing
Construction
Service Sector
Import Duty
GDP
FY06
1.1
0.6
2.6
1.7
0.7
3.0
-0.1
6.6
FY07
1.0
0.5
2.3
1.6
0.6
3.3
-0.1
6.4
FY08
0.7
0.3
1.9
1.2
0.5
3.1
0.5
6.2
FY09
0.8
0.5
1.8
1.1
0.5
3.0
0.1
5.7
FY10
1.0
0.7
1.9
1.1
0.5
3.1
0.1
6.1
Analytical Review of Bangladesh’s Macroeconomic Performance in FY2011-12: Third Reading
FY11
1.0
0.6
2.4
1.6
0.6
3.0
0.3
6.7
FY12
0.5
0.1
2.8
1.7
0.7
2.9
0.1
6.3
Difference
(FY11 and FY12)
-0.5
-0.5
0.4
0.1
0.2
-0.1
-0.2
-0.4
12
2.1 ECONOMIC GROWTH SLOWS DOWN
Investment and Savings: Stagnation Continues
GDP of FY12 overwhelmingly dominated by private consumption (80%)
A stagnating investment with a distinctive fall in private investment share
An optimistic projection from the share of public investment

Various proxy indicators suggest that the public investment-GDP ratio may
have to be revised downward from 6.3% to 5.7 %
Initial estimate of aggregate investment rate stood at 25.4% of GDP in FY12
which may be revised downward
The investment target for FY13 has been set at 29.6 % of GDP

A rise in investment-GDP ration by more than 4.2 percentage points.

Private investment, in this case, will have to rise to 22.7% of GDP from 19.1%
ICOR increased from 3.7 in FY11 to 4.0 in FY12
According to the SFYP target, ICOR is expected to be at this level (4.1) in FY13
In absence of fast accumulation of investment from private sector and
improved implementation of government investment plan (ADP), achieving
the GDP growth in FY13 will remain a far cry
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2.1 ECONOMIC GROWTH SLOWS DOWN
Revision of GDP (FY12) Estimates: What to Expect
Provisional GDP for FY12 is expected to be revised at a later date
Public investment will be revised downward as at least 10% of RADP may
remain unrealised

Construction sectors growth in the final estimate is expected to be lower
Manufacturing growth may also require some downward adjustment

QIP (large and medium) data is available for Jul-Feb (11.8% growth)

Export in Mar-Apr declined by (-) 7.2% - production is also expected to decline

Export is declining particularly for knit - a higher value addition (GDP) loss

Containing manufacturing growth needs higher domestic demand

It took a 17.7% production growth for a growth of 10.9% GDP growth for large
and medium manufacturing sector in FY11
In contrast, the growth in agriculture sector may be revised upward in view of
higher than expected production of Boro
Combining all these recent developments, a downward adjustment of GDP
may be reasonably expected in the course of time
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2.2 PUBLIC FINANCE: WEAKEST LINK
Fiscal management in FY12 was put under serious pressure in view of the
soaring revenue expenditure and mounting subsidy demand.
Lack of support from foreign and non-bank sources of financing did not help.
As it appears from the targets and the actual scenario, the fault line, to a large
extent, originated from the unfounded targets for FY12 resulted largely from the
uncoordinated fiscal planning in relations to other sectors.
Subsidy projections particularly were totally out of line with the government’s
plan for the power sector including the establishment of rental power plants and
the associated rise in fuel demand.
MISMATCH OF TARGETS AND ACTUAL DEVELOPMENTS IN FISCAL SECTOR
Actual Growth Target Growth Actual Growth (July to
Targets
FY11
FY12A
latest in FY12)
NBR
28.0
15.7
18.1
Revenue Expenditure
17.5
12.0
32.5
ADP
26.8
40.0
8.6
B
Subsidy Expenditure
52.1
18.5
69.8 C
Foreign Financing
-50.6
293.5
163.0
Bank Borrowing
-24.8
80.3
Non-Bank Borrowing
-72.2
65.8
Net negative
Note: A Budgetary targets for FY12 over actual FY11.
budget growth over revised budget.
B
Growth target over revised budget.
Analytical Review of Bangladesh’s Macroeconomic Performance in FY2011-12: Third Reading
C
Revised
15
2.2 PUBLIC FINANCE: WEAKEST LINK
Revenue Earnings
NBR: surpassing targets, yet again
Thanks to rising import duty, VAT (local) and income tax, NBR surpassed its
annual growth target of 15.7% during Jul-Mar, posting a growth of 18.1%.
NBR could exceed its annual collection by about Tk. 1,500 crore.
Non-NBR Tax and Non Tax Revenue – more needs to be done
Non-tax revenue component also performed well during Jul-Jan period with an
impressive 61.8%, underwritten by spectrum and license renewal fees.
However, non-NBR tax slowed down quite considerably during the first seven
months, posting only 11.1% increase compared to the annual target of 18.7%.
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2.2 PUBLIC FINANCE: WEAKEST LINK
Revenue expenditure: defying limits
During Jul-Jan of FY12, augmented revenue expenditure posted 32.5% growth,
defying the original growth target of only 12.0%.
Major rise in expenditure was observed for acquisition of assets and works
(879.9%), interest payments (27.0%) and subsidies and current transfers (38.0%).
Almost 50% of the incremental revenue expenditure (excluding acq. of assets
and works) came from subsidies and current transfers.
Expenditure on Subsidies: the Built-in destabiliser
A major destabilizing feature of the fiscal management in FY12.
With (surprisingly) unforeseen subsidy demand rising, several measures taken:
rental capacity maintained unutilised, price adjustment of fuel and power
Even then, total requirement went up to about Tk. 40,000 crore (4.4% of GDP!)

It is now decided that Tk. 10,000 crore subsidy will be transferred to FY13
this could result in an inbuilt instability in the budget for FY13
Government is expecting significantly lower subsidy next year


based on full-fuel price adjustment expectation (ECF conditionality)? What
about its impact on inflation?
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2.2 PUBLIC FINANCE: WEAKEST LINK
Annual Development Programme (ADP): poorest show in recent times
In stark contrast to the revenue expenditure, the spending on the ADP, the more
productive part of public expenditure, remained dismally low during the first
three quarters of FY12.
The ADP was revised downward by Tk. 5,000 crore to Tk. 41,000 crore.
During July-April, only 55.4% of the RADP implemented
the lowest implementation rate in the tenure of the current government.
More critically, aid utilisation rate has been even lower, at only 47.6%.

According to CPD estimates, projected shortfall in overall ADP implementation
this year may amount to about Tk. 9,300 crore.
Implying 79.8% ADP (original) implementation; or 89.5% of the RADP.
If the projection comes true, the ADP/GDP ratio for this year will go down to 4.0
%, a reversal of the improving trends observed after FY08.

At the same time, if the current financing composition of project aid and local
resources remain, it is estimated that this year’s ADP will end up with the lowest
aid utilisation rate since FY01 (61.7%).
Analytical Review of Bangladesh’s Macroeconomic Performance in FY2011-12: Third Reading
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2.2 PUBLIC FINANCE: WEAKEST LINK
Sorry state of the largest 20 projects taken by the current government
Construction of Padma Multipurpose Bridge (rev)
Construction of 820MW peaking power plant (rev)
Priority based important rural infrastructure development project
Bheramara Combined cycle plant (360MW) development
2009-2015
2009-2012
2010-2013
2010-2014
2050720
695986
469113
414048
1624952
322108
Cumulative
implementation up to
Nov FY12 (%)
4%
52%
12%
1%
Revitalisation of community health care initiatives in Bangladesh
First class materological observation centre at Panchagar, Bandarban, Khagrachori,
Coxsbazar
Development of physical infrastructure of selected non-government high schools
Construction of Shiddhirganj 335MW peaking combined cycle power plant
2009-2014
267749
50000
0%
2009-2013
2011-2014
2009-2015
249696
211480
207781
150213
0%
0%
0%
3G network technology establishment and extension of 2.5G network
2011-2012
190099
147700
0%
Construction of meter gauge line at Dohajari-Coxsbazar and Ramu-Gungdum
2010-2013
185235
118228
1%
Feasibility study and railway construction from Khulna to Mongla port
2010-2013
172139
120231
0%
Bibiana-Kaliakoir 400KV and Fenchuganj-Bibiana 230KV transmission line
ekti bari, ekti khamar project (rev)
South-West rural infrastructure development
Renovation of ailed roads under Roads and Highways (R&H)
2010-2013
2009-2013
2010-2013
2011-2012
172085
149292
148072
141027
70000
9%
15%
4%
6%
Rural electrification upgradation project(Rajshahi, Rangpur, Khulna, Barisal division)
Dredger and related machinery procurement for Capital dredging of rivers of
Bangladesh
Construction of Shiddhirganj 2*120MW peaking power plant (2nd rev)
Asrayan-2
Important urban infrastructure development project
Total for the 20 projects
2010-2015
132218
2010-2012
2009-2012
2010-2015
2011-2014
130988
124363
116918
115099
6344108
Project Name
Project
Duration
Project cost (lakh Taka)
Total
Analytical Review of Bangladesh’s Macroeconomic Performance in FY2011-12: Third Reading
Aid
107113
99554
7700
2817799
0%
0%
70%
0%
1%
10.3%
19
2.2 PUBLIC FINANCE: WEAKEST LINK
Largest 20 aided projects in the RADP of FY12: less than average performance
Name of project
Implementation rate (% of RADP allocation)
Total
Taka
Aid
Introduction of 3G network technology and expansion of 2.5G network
42.3
0.0
42.2
Construction of Horipur 360 MW Combined Sycle Power Plant and
Associated Sub-Station (ECGB Comonent)
38.6
22.7
43.3
Conctruction of Padma Multipurpose Bridge
40.6
67.0
31.1
2nd Local Governance Support Project (LGSP-2)
0.0
0.0
0.0
Shahjalal Fertilizer Project
0.0
0.0
0.0
Construction of Sirajgonj 150 MW Gas Turbine Power Plant
68.0
41.0
96.4
Maternal, Newnetal, Child and Adolescent Health Care
0.0
0.0
0.0
Special Purpose Development Assistance
0.0
0.0
0.0
Karnafuli Water Supply Project
41.1
118.8
22.9
Second Rural Infrastructure Improvement Project (RIIP-2)
76.3
96.2
64.1
Saidabad Water Treatment Plant Project
73.0
78.3
71.1
Bangladesh Railway Sector Improvement Project (Construction of Double
Line upto Tongi-Bhairab including Signalling Component)
46.2
22.1
59.4
Secondary Education Quality Enhancement Project (SEAQP)
36.4
2.4
40.8
Construction of Shiddergonj 2*120 MW Piking Power Plant
58.3
0.0
110.2
Bangladesh Power Zone Distribution Project
42.4
26.7
44.1
Procurement of Single Decker CNG Buses
0.0
0.0
0.0
School Feeding Programme in Poverty Affected Area
52.5
22.3
75.7
Project for Infrastructure Development and Secondary City Management
79.5
57.1
82.8
Clinical Contraception Services Delivery
0.0
0.0
0.0
Primary Education Development Project-3
0.0
0.0
0.0
Average for 20 projects
34.0
29.3
35.7
Overall RADP Jul-Mar
50.3
55.7
40.9
Share of 20 in the total RADP of FY12
Analytical Review of Bangladesh’s Macroeconomic Performance in FY2011-12: Third Reading
20.6%
20
2.2 PUBLIC FINANCE: WEAKEST LINK
Budget Deficit: in desperate need of foreign financing
The low aid utilisation in the ADP had severe repercussions for the bankborrowing needs of the government to finance the deficit.
Latest available information shows that as of May 21, total borrowing by the
government from the banking system stood at Tk. 18,452 crore; hovering around
the original target for the entire year.
The government later revised the target to Tk. 27,900 crore for FY12.
Utilisation of the foreign resources accumulated in the pipeline (USD14 bln) has
become an urgent necessity; a reflection of Bangladesh’s lack of ability to use
resources earmarked under foreign aided projects.
The second area of intervention is the non-bank sources of financing.
the government is planning to introduce five new savings schemes which
targeted towards elderly people, farmers, students and persons with disabilities.
It is to be borne in mind that more than the lack of government savings schemes,
it is the issue of competitiveness of these against commercial deposit rates
offered by private banks that actually matters more. This is an issue that needs
careful considerations.
Analytical Review of Bangladesh’s Macroeconomic Performance in FY2011-12: Third Reading
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2.3. MONETARY POLICY:
HURTING ECONOMIC GROWTH
Inflationary Pressure Continues: Non-Food Inflation in the Driver's Seat
Annual average general inflation 10.9% in April FY12 (8.5% in April 2011)
 Food inflation 11.4% in April FY12 (11.0% in April 2011)
 Non-food inflation 10.0% in April FY12 (4.2% in April 2011)
A decomposition of inflation figures as on April 2011 and 2012 reveals –



Of incremental inflation i.e. 2.4
percentage
points
–
2.0
percentage points (or 82.7%) was
originated from non-food
clothing
&
footwear
(0.6
percentage points),
gross rent, fuel & lighting (0.6
percentage points),
transport and communication
(0.2 percentage points)
SOURCES OF ANNUAL AVERAGE INFLATION
Indeed, adjustment of administered prices of petroleum products and
electricity, depreciation of Taka and increase in cost of production made a
mark on price level of non-food items.
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2.3. MONETARY POLICY:
HURTING ECONOMIC GROWTH
Inflationary Expectation to Continue
Cost-push and structural factor overwhelmingly underpin the incremental
inflation in recent times
Among the cost-push factors, a number of issues were identified in the
present context including upward adjustment of administered petroleum and
electricity prices, increase in cost of production including wage rates, and
depreciation of exchange rate
It is also expected that the administered prices of key intermediate products
(electricity, petroleum products, natural gas, fertiliser etc.) may be adjusted
further
Stagnation in investment situation also indicates that the cost of production will
not going to decline anytime soon
Inflationary expectation remains quite high
Contractionary Monetary Policy pursued with Limited Success
In the recent MPS, Bangladesh Bank has reduced growth of credit flow to private
sector and expanded government borrowing targets
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2.3. MONETARY POLICY:
HURTING ECONOMIC GROWTH
GROWTH OF CREDIT AND MONEY SUPPLY
Until December 2011, private sector credit
growth was on a declining path
Whereas
government
credit
was
demonstrating incremental growth
During the third quarter of FY12,
government managed to check its borrowing
from banking system - resulted in reducing
growth of government borrowing.
Concurrently, growth rate of credit to other public sector fell drastically
Falling growth of private sector credit somewhat stabilized at around 19.0-19.5%
Overall money supply growth came close to its target at the end of March FY12
PRIVATE SECTOR CREDIT GROWTH AND
INFLATION
Monetary contraction found to be not
effective in controlling overall inflation as
well as its non-food component.
Non-food inflation continued to soar at a
time when credit growth to private sector
was on decline
Analytical Review of Bangladesh’s Macroeconomic Performance in FY2011-12: Third Reading
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2.3. MONETARY POLICY:
HURTING ECONOMIC GROWTH
Monetary Policy Stance for FY13: Bold Steps Warranted
It appears that throughout FY12 the central bank’s monetary policy prioritised
inflation control over growth acceleration and lost the battle in both fronts.
In reality, the framework of forthcoming monetary policy from the central will
largely depend on fiscal policy
No doubt, without restraining government’s bank borrowing, discipline in
the monetary sector will be difficult to attain
According to IMF country report, the projections for private sector credit and
money supply growths are 14.9% and 15.4% respectively
The question is how these ‘projections’ are going to guide the upcoming MPS.
Bangladesh Bank will need to consider the fact that GDP growth projection
of IMF for FY13 is also lower at 6.2%.
This target is even lower compared to the provisional figure for FY12 and about
1.0 percentage point lower than the target of the government for FY13
Hence, Bangladesh Bank is posed with a difficult choice between following a
tighter monetary policy and ensuring credit to the private sector to achieve
the targeted growth
An independent central bank will not shy away from choosing the latter
Analytical Review of Bangladesh’s Macroeconomic Performance in FY2011-12: Third Reading
25
2.4 BALANCE OF PAYMENT: NOT OUT OF DANGER
As the economy entered into the last quarter of FY2011-12, all the
macroeconomic correlates associated with BoP were moving downwards.
Export Earnings: Short of Target
At the end of first ten months attaining export growth target appears to be
impossible
Of the exported products knit-RMG has underperformed significantly
Export to the US market has been rather weak while since January 2012 export
earnings from the EU also had started to decline
Export earnings from non-traditional markets were impressive but inadequate to
sustain overall export growth
Moreover, slowdown in private investment may also adversely affect exportoriented industries in the coming months
The gloomy global outlook, along with the possibility of prolonged crisis in
the Eurozone and underperformance in the US market do not promise any
quick recovery from the depressed ongoing reality
Indeed, export growth has fallen into negative terrain in Mar-Apr
Analytical Review of Bangladesh’s Macroeconomic Performance in FY2011-12: Third Reading
26
2.4 BALANCE OF PAYMENT: NOT OUT OF DANGER


It is difficult to explain what leads to such a frustrating performance of export
First, attaining a higher growth on a high benchmark (FY11) became difficult
Second, scope for using unused capacity (if any) may also have become limited
in FY12 due to insignificant improvement in investment situation
As a result it has been difficult for the exporters in FY12 to expand their capacity
to supply more
Third, previous fiscal year’s export growth may have been largely value-driven
underpinned by rising unit prices as a result of significant rise in prices of raw
materials
The average cotton price during Jul-Apr FY12 declined by (-) 29.8%

This should also be reflected in international prices of RMG products

Thus, in value terms the export may have experienced a setback, but in volume
terms the decline in growth may not have been that significant
Fourth, the performance of export sector is tied with the global developments
and grim global outlook affected the export orders
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27
2.4 BALANCE OF PAYMENT: NOT OUT OF DANGER
Import Payments: Demand for Petroleum Holds the Key
Imports did not see a significant reduction, leading to heightened pressure on
the BOP position
Growth of import payments originated mainly from the higher demand for
imported petroleum as about one-third of the incremental import payments
came from import of these products

Import of petroleum products registered a whopping 39.2% growth in Jul-Mar
In contrast, other commodities registered only 8.5% growth
Regrettably import payments for capital machinery declined by (-) 20.0% –
indicating stagnation in investment situation in FY12
Indeed, in the backdrop of import pressure (along with subsidy requirement),
the government is not utilising fully the capacity of liquid fuel run quick
rental power plants
It may be anticipated that the high growth of petroleum import will be
maintained, as growth of L/Cs opening for import of the petroleum stood at
75.9% during the first three quarters of FY12.
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2.4 BALANCE OF PAYMENT: NOT OUT OF DANGER
Balance of Payments: Concerns Remain
In the face of a widening trade balance, remittance inflow, inspite of the
commendable growth, could not keep pace with the widening trade deficit
Despite some improvements, foreign aid inflow remained below par
 Net foreign aid inflow during July-April FY12 (USD 1.0 billion) was USD 194
million higher than the disbursement of July-April FY11 - but USD 459 million
less than the corresponding period of FY10
Both the BoP and the value of BDT against foreign currencies remain on shaky
ground
The government took IMF-ECF support which came against a long list of
structural benchmarks
 It is however unclear whether the government will be able to receive all the
planned disbursements from IMF by fulfilling all the conditionalities
 In the present context, one may reiterate that the government is far better off by
utilising the existing foreign aid awaiting in the pipeline.
Without support in the form of higher net inflow of foreign aid, BoP will
continue to remain vulnerable in the near term
With looming uncertainties in the developed world, external sector balances will
likely be under some pressure over the next months
Analytical Review of Bangladesh’s Macroeconomic Performance in FY2011-12: Third Reading
29
INVESTMENT
SITUATION
3. INVESTMENT SITUATION
Widening the gap
Acceleration of investment has been identified as one of the major strategies for
attaining targeted economic growth during the SFYP period (FY11-15).

●
So far the performance was unsatisfactory
This section seeks to address the following issues:
● Is aggregate investment in Bangladesh stagnating?
● Is the current trend in public investment failing to ‘crowd in’ private
investment significantly?
● Is there any liquidity crisis in the commercial banks from the perspective of
investment financing? Is public investment in recent years ‘crowding out’
private investment?
● Are there other factors that explain the slowing down of aggregate
investment particularly private investment?
Analytical Review of Bangladesh’s Macroeconomic Performance in FY2011-12: Third Reading
31
3. INVESTMENT SITUATION
Growth-investment linkage-debates over public and private investment
Public investment (ADP/RADP) does not show any significant rise in real term
 Yearly growth of 6.3% between FY09 and FY12 (inflation adjusted)
 It shrunk during FY06 to FY09
Size of ADP in terms of actual expenditure did not increase notwithstanding the
claims by the policymakers
Local sources are increasingly used for financing ADP particularly through bank
borrowing
 93% of total local finance in Jul-Mar FY12 by bank borrowing (74% in FY09)
Share of banking and non-banking sectors in government borrowing
Net borrowing of the Govt. from the banking system 1/
Net non-bank borrowing of the Govt. from the public 2/
79
74
70
67
65
93
53
47
52
48
35
33
21
32
30
26
201011R
7
Jul.-Mar.,
201011R
Analytical Review of Bangladesh’s Macroeconomic Performance in FY2011-12: Third Reading
2008-09
2007-08
2006-07
2005-06
2004-05
2003-04
2001-02
13
Jul.-Mar.,
201112P
100
90
80
70
60
50
40
30
20
10
0
32
3. INVESTMENT SITUATION
Fluctuation of the excess liquidity in banks cannot always be explained by
additional public borrowing.
A number of other issues related to the financial market may be partly
responsible for shortages of credit flow to the private sector.
Analysis of VECM by CPD shows that public borrowing may not have
significant ‘crowd-out’ effect on private investment in Bangladesh.

Majumder (2007) found a negative and significant relationship
CPD’s analysis found positive but insignificant relationship
EXCESS LIQUIDITY
20000
18000
16000
14000
12000
10000
8000
6000
4000
2000
0
State Owned Bank
Private Bank(Islamic)
Specialized Bank
Private Bank
Foreign Bank
Analytical Review of Bangladesh’s Macroeconomic Performance in FY2011-12: Third Reading
33
3. INVESTMENT SITUATION
Examining the ‘complementary’ role of public investment
Present government has put special focus on a few selected sectors
Power, transport and rural development (45% of the RADP in FY2012).
Some of the qualitative aspects have led to question on the extent of ‘crowding
in’ effect of public investment

Effective electricity generation was only about 50% of the installed capacity
 Fiscal burden and pressure on BoP
 Low level of project implementation (55% during July-April, 2012)
An exercise of VAR model by CPD found insignificant crowd-in effect of public
investment on private investment

Slowing down of private investment
Private investment has been slowing down in FY12 (4.3% against 6.9% in FY11)



Disbursement of agricultural credit decelerated in July-March, FY12 (6.2%
vis-à-vis 16.6%)
Industrial term loan disbursement was mere 2.3% higher during the same
period
FDI flow declined by 3.5% during July-March, FY12
Analytical Review of Bangladesh’s Macroeconomic Performance in FY2011-12: Third Reading
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3. INVESTMENT SITUATION
Slowing down of private investment
Outward transfer of foreign-owned companies in recent years was high
Net inward FDI flow will be negative (- US$51 million) in July-March, 2012
 Lack of reinvestment interest of the existing foreign-owned companies
The capital market is in a volatile state since its collapse in December, 2010


Numerous initiatives undertaken were by and large unable to restore
discipline and stability
FDI inflow and Outward Transfer: Net Result
700
571
565
600
553
551
593
500
400
300
288
200
100
18
-42
0
-100
Jul-Mar., 2010*
-200
-300
-400
-277
Jul-Mar., 2011*
Jul.-Mar., 2012*
Foreign direct investment
Outward transfers
FDI inflow after deducting outward transfers
Analytical Review of Bangladesh’s Macroeconomic Performance in FY2011-12: Third Reading
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3. INVESTMENT SITUATION
Less improvement in business enabling
environment
Adversities
environment
in
business
Problematic factors
enabling
Inadequate supply of electricity and
gas and poor physical infrastructure
 High inflation and high lending rates
of commercial banks
 Devaluation of local currency against
US$
National, regional and district level
highways/roads were not in good
condition

Average roughness index increased
in FY10 compared to the previous
years
‘Access to finance’ is one of the most
important problematic factors that inhibit
business -emerged from the EOS 2012

Top Problematic Factors
2012
Ran
Weight k
Inadequate supply of infrastructure
20.6
1
Corruption
17.6
2
Access to finance
10.0
3
Inefficient government bureaucracy
9.4
4
Policy instability
8.5
5
Inflation
8.4
6
Government instability/coups
5.7
7
Foreign currency regulations
4.2
8
Tax rates
4.0
9
Inadequately educated workforce
3.9
10
Complexity of tax regulations
Poor work ethic in national labour
force
2.3
11
1.7
12
Crime and theft
1.7
13
Restrictive labour regulations
1.1
14
Poor public health
0.8
15
Analytical Review of Bangladesh’s Macroeconomic Performance in FY2011-12: Third Reading
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3. INVESTMENT SITUATION
Summary
Investment targets set forth in the Sixth Five Year Plan faced a major hurdle
Over the years, financing of the ADP through bank borrowing has been on the
rise.
 Public borrowing may not have significant `crowd-out' effect on private
investment in Bangladesh. But there are indications for crowd-out effect
 Similarly, public investment have insignificant crowd-in effect on public
investment.
Adversities in business enabling environment are found to be responsible for
slowing down of private investment.
The Central Bank should revisit its monetary policy
 To ensure that the interest of the private sector with respect to access to credit
is not undermined
A strong coordination is required
 Between fiscal measures, budgetary targets with that of benchmarks set in the
financial sector
Government should strongly assess the quality of public sector projects
Appropriate and timely measures on the part of the regulatory authorities
(Bangladesh Bank, SEC and Ministry of Finance) are needed
 To restore discipline in the financial sector
Analytical Review of Bangladesh’s Macroeconomic Performance in FY2011-12: Third Reading
37
ON CROP PRODUCTION
AND FOOD SECURITY
4. ON CROP PRODUCTION AND FOOD SECURITY
The issue of long term food security has emerged as a concern for the
policymakers as to whether the growth record could be sustained in future and
whether Bangladesh has reached a technological frontiers.
Aman production increased by only 0.05% along with 1.1% declining rate of
cultivable land in FY2012. Thanks to the productivity growth of about 1.22 per
cent.
The early production estimates of Boro shows a growth of about 0.3%.
40000
Aman
aus
growth rate
8
7
30000
6
Production (TMT)
According to a CPD estimation,
in FY 2012 a total amount of 5.0
MMT rice was available as
production surplus which was 5.7
MMT in FY 2011.
Boro
35000
25000
5
20000
4
Growth (%)
During July-March FY2012, total
import of foodgrains was 44 per cent
lower than the compared months of
FY2011.
9
15000
3
10000
2
5000
1
0
0
2008/09
2009/10
2010/11
2011/12
Source: FPMU
Analytical Review of Bangladesh’s Macroeconomic Performance in FY2011-12: Third Reading
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4. ON CROP PRODUCTION AND FOOD SECURITY
Farmers may face disincentives in this year because of Low coverage and delayed start of government procurement
 Relatively low market price in the post harvest season in FY2012
 No additional storage capacity over the last three years
Boro
production
cost
was
18%
higher
this
season
compared to the last year due to upward revision of prices for fertilizer, diesel and
electricity and increasing labour cost
The procurement prices of rice (Tk. 28/kg) and paddy (Tk. 8/kg) are just
enough to meet the cost of production.
At present on an average the farmers have to incur a loss of Tk. around 150
per maund of paddy
Rice price in the international market is showing a declining trend
Due to good harvest and large carry-over stocks in major importing countries,
world rice price is expected to decline further in the coming days.
In Bangladesh, dependence on import from the international market is likely
to be lower this year for owing to a good Boro harvest and a comfortable level of
stock.
Analytical Review of Bangladesh’s Macroeconomic Performance in FY2011-12: Third Reading
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4. ON CROP PRODUCTION AND FOOD SECURITY
In the budget for FY12 about Tk. 4,500 crore was allocated on account of
agriculture sector’s subsidy.
However, the requirement increased to about Tk. 10,000 crore of which Tk.
6,500 crore will be accommodated in the revised budget for FY12 and the rest
(Tk. 3,500 crore) will be deferred to the next year’s budget.
If as reported Tk. 6,000 crore (plus Tk. 3,500 crore) will be allocated as
agriculture subsidy for FY13.
This would imply that the government in due course has to either enhance the
allocation or undertake radical price adjustments of inputs, in case it does not
want to go below the FY12 benchmark.
To ensure proper distributional justice and allocative efficiency, it is important
to revise the beneficiary list of the farmers on a regular basis.
Initiatives with regard to rice procurement, including fixation of price, will
need to be taken in a timely manner.
Analytical Review of Bangladesh’s Macroeconomic Performance in FY2011-12: Third Reading
41
EMPLOYMENT
GENERATION
5. EMPLOYMENT GENERATION
Employment scenario in Bangladesh
With a reasonably high GDP growth Bangladesh economy has gradually moved
from an agrarian to a more industry and services sector based economy.
However, the growth has not been accompanied by adequate employment
creation and the number of unemployed people has increased over the years.
One of the encouraging developments in the employment scenario of the
economy has been the increase of female participation in the labour force.
Between 2000 and 2010, female labour force doubled, against a 39.3% growth
in the overall labour force.
Employment targets in the strategic planning documents

The government in its manifesto targeted to reduce unemployment by more than
50 per cent by 2021, with accelerated structural shift in the economy.
The SFYP, however, remains less optimistic pessimistic in its targets:


unemployment rate is not going to decline compared to FY10 until the very
last year of the plan period (only marginally by 0.3 per cent).
total number of unemployed people is projected to increase in the next few
years (till FY14) and is expected to return to the FY10 level in FY15.
Analytical Review of Bangladesh’s Macroeconomic Performance in FY2011-12: Third Reading
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5. EMPLOYMENT GENERATION
Employment creation during the last three years and Prospects for SFYP targets
Recently it has been claimed by the government that about 6.8 million jobs have
been created during the last three years.
In the absence of annual labour force (employment) survey, it is difficult to discuss
the incremental changes that have been in the employment situation over the last
three years.
Based on the sectoral elasticity approach CPD has estimated that during the last
three years (end of FY09 to FY12) about 5.8 million employments have been
created i.e. an annual average of 1.9 million.
 one million less than that of the official claim
Based on CPD estimates, if the economic growth projections of the SFYP
materialise, by FY15 the traditional employment concerns will be eliminated, but
underemployment will continue to prevail as a major concern.
ESTIMATED EMPLOYMENT DURING THE LAST THREE YEARS
FY10
Labour force
New employment
Total employment
Unemployment
Unemployment rate
FY11
56.7
1.9
54.1
2.6
4.6
FY12
58.5
2.1
56.2
2.3
3.9
60.3
1.8
58.0
2.3
3.8
CPD estimate based on Labor Force Surveys (various years).
Analytical Review of Bangladesh’s Macroeconomic Performance in FY2011-12: Third Reading
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5. EMPLOYMENT GENERATION
Way forward
With three years left for the implementation of the SFYP, any significant change in
the composition of the GDP may not be realistic.
However, the government may try to achieve the aggregate growth projection
which is a difficult, but not impossible task, given the performance that
Bangladesh economy was able to demonstrate over the recent past.
Two other important areas of interventions:
Employment generating safety net programmes (SNPs)
 For example, in FY12 about 8.6 million person-months of employment
generated through the Employment Generation Program for the Poorest
(EGPP), the Food for Work programme and the National Service programme.
 Challenge is to generate additional employment opportunities through SNPs
Overseas employment
 During FY06 to FY10 (between the last two LFSs), 2.9 million people went
abroad from Bangladesh for jobs; equivalent to about 40 per cent of the new
entrants to the labour market during this period.
 Apart from strengthening diplomatic relations, challenge lies in reducing cost
of migration and enhancing skills through training programmes to cater for
the particular needs of the overseas markets.
Analytical Review of Bangladesh’s Macroeconomic Performance in FY2011-12: Third Reading
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REVIEW OF POLICY AND
REFORM INITIATIVES
6. REVIEW OF POLICY AND REFORM INITIATIVES
Introduction
Need for undertaking reforms and policy initiatives: a generally accepted wisdom
for developing countries
The Caretaker Government (2007-2008), as part of the broader development
strategy, introduced a series of reform programmes in some key areas of
governance and development (ease of doing business; land administration)

Regulatory Reforms Commission, Bangladesh Better Business Forum, etc
The present government expressed its keen interest to pursue policy initiatives
and reforms with a view to addressing bottlenecks and improving the quality of
management of the economy. This got reflected in various documents: the Awami
League Election Manifesto and the Rupokolpo 2021; three budget speeches;
Perspective Plan; Sixth Five Year Plan (SFYP)
Analytical Review of Bangladesh’s Macroeconomic Performance in FY2011-12: Third Reading
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6. REVIEW OF POLICY AND REFORM INITIATIVES
Introduction
Government’s reforms and policy initiatives have been grouped under three
categories
•
economy-wide policies,
•
economic governance, and,
•
development administration;
A tracer study was undertaken with regard to the aforementioned initiatives with
a view to:
•
To make an assessment of the progress made so far with regard to the
relevant policies and laws/acts/regulations/ordinance etc (preparation of
drafts, enactment of laws by the parliament)
•
To comment on the state of follow-up actions to pursue and implement the
policy initiatives in the aforesaid areas.
Analytical Review of Bangladesh’s Macroeconomic Performance in FY2011-12: Third Reading
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6. REVIEW OF POLICY AND REFORM INITIATIVES
Policy and Reform Initiatives
Economy-Wide Policies
Consolidation of Fiscal Management (e.g. VAT Act)
Introducing E-Governance (e.g. National Information and Communication
Technology Policy 2009)
Land Administration and Food Security (e.g. National Agriculture Policy)
Resource Mobilisation through PPP (e.g. PPP Policy and Guidelines)
Managing the Industrialisation Process (e.g. Industrial Policy 2010-2014)
Capital Market Management (e.g. SEC reforms)
Developing the Energy Sector (e.g. Power and Energy Fast Supply (Special
Provision) Law, 2010)
Financial Sector Management (e.g. Anti-Money Laundering Law 2012)
Analytical Review of Bangladesh’s Macroeconomic Performance in FY2011-12: Third Reading
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6. REVIEW OF POLICY AND REFORM INITIATIVES
Policy and Reform Initiatives
Economic governance
Strengthening the Anti-Corruption Commission (e.g. Proposal to put in place
ACC Act)
Institutions to Promote Reforms (e.g. Independent Vision 2021 Council was
proposed to be set up)
Development administration
Raising Efficacy of Public Administration (e.g. Proposed Civil Service Act)
Decentralisation of Public Administration (e.g. Administrative devolution to
local government bodies
Although some progress have been made in following up with the proposed
initiatives, the list of unfinished agendas remains long.
Analytical Review of Bangladesh’s Macroeconomic Performance in FY2011-12: Third Reading
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6. REVIEW OF POLICY AND REFORM INITIATIVES
Review of the Policy and Reform Initiatives
Failure to address some key areas including reforms and policy changes in

public
expenditure,
the
state-owned
enterprises,
civil
service
and
administration, land administration, subsidy management
Delay in finalising the coal policy
Slow progress in the areas of PPP and MTBF
Real decentralisation and devolution of power have not taken place
Police Reform Act is yet to be finalised
Lack of preparatory framework for the effectiveness of the VAT Law
Financial Reporting Act (FRA) is yet to be drafted
Analytical Review of Bangladesh’s Macroeconomic Performance in FY2011-12: Third Reading
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6. REVIEW OF POLICY AND REFORM INITIATIVES
Review of the Policy and Reform Initiatives
Enactment of appropriate reforms in civil service and other areas have faced
resistance from vested groups bent on upholding narrow coterie interests
Absence of wide-ranging stakeholders’ consultation and, in some instances, a
lack of the needed drafting capacities in place, has led to a need for repeated
amendments of the law
Performance Based Evaluation System (PBES) for various Ministries is yet to be
introduced in a comprehensive manner
Institutions to promote economic reforms and maintain its momentum are
missing (Ombudsman; Pay, Services and Regulatory Reforms Commission
(PSRRC); Perspective Plan Management Office (PPMO); an Independent Vision
2021 Council)
Analytical Review of Bangladesh’s Macroeconomic Performance in FY2011-12: Third Reading
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6. REVIEW OF POLICY AND REFORM INITIATIVES
Conclusion
Inability to undertake the needed reforms in some of the key areas
Slow progress in cases where reforms were initiated
Weakness in undertaking associated measures to make the reforms more
effective
Weak preparatory work in view of proposed reforms
Lack of oversight for ensuring effective follow-up efforts
Heightened need for Bangladesh’s policymakers to take a serious review of the
reform measures and policy initiatives and energetically act on the unfinished
agendas
Analytical Review of Bangladesh’s Macroeconomic Performance in FY2011-12: Third Reading
53
OUTLOOK FOR FY2013
OUTLOOK FOR FY2013
Although the economy has clocked a 6.3 per cent GDP growth (provisional
estimate) in FY12, the foregoing analysis indicates that, from economic
perspective, FY12 had been the weakest of the three years of the present
government.
This weakness manifested itself in a major way in continued stagnation, if not
fall in the aggregate investment rate including both its components, viz. public
and private.
Record low level of implementation of ADP as well as utilisation of foreign aid
has aggravated the situation further.
Indeed, the investment targets of the SFYP are increasingly moving out of reach.
Thus, the single most important objective for the next fiscal year should be
revamping the investment situation with a view to attain the targeted GDP
growth rate.
Analytical Review of Bangladesh’s Macroeconomic Performance in FY2011-12: Third Reading
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OUTLOOK FOR FY2013
Lax macroeconomic management has been greatly responsible for many of the
recent economic woes.
This relates particularly to the shabby public resource management.
Notwithstanding the steady above the trend performance of the NBR, the
government could not tap adequately the non-NBR tax and non-tax sources for
additional revenue.
More importantly, increasing inability to effectively access the committed
foreign aid has given rise to a number of serious tensions in financing
development expenditures.
Consequently, the government has to greatly lean on the banking sector for
additional resources, particularly to meet the unplanned subsidy demand.
Accordingly, restoring fiscal discipline would be another major challenge in
FY13.
Analytical Review of Bangladesh’s Macroeconomic Performance in FY2011-12: Third Reading
56
OUTLOOK FOR FY2013
One of the major sources of weaknesses of macroeconomic management in FY12
related to the energy sector.
Inadequate understanding about the implications of massive use of rental power
plants not only created serious destabilisation in fiscal as well as balance of
payment management, it also defeated the very purpose of the initiative, i.e.
quick and steady supply of electricity.
One definitely needs to revisit this initiative in FY13 so as to limit its negative
spillovers on government exchequer, and at the same time, rigorously pursue
implementation of the big power generation projects along with attempts to
bring more gas supply on stream.
However, it seems the government has lost the opportunity to finalise the Coal
Policy in its present tenure.
Analytical Review of Bangladesh’s Macroeconomic Performance in FY2011-12: Third Reading
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OUTLOOK FOR FY2013
By deferring Tk. 10,000 crores of subsidy payment to the upcoming budget and
allocating unsustainably low amount for subsidy and transfer, the government
has created a built-in destabiliser in the budgetary management. Prudent
management of subsidy will continue to be a vexing issue in the upcoming fiscal
year.
Controlling the government’s borrowing demand will be the central bank’s one
of the important preoccupations.
What would be also important for the Bangladesh Bank to create adequate space
for the private sector’s access to credit so as to meet the revealed investment
demand.
One will have to wait for the announcement of the next MPS to understand
whether the central bank will seek to undermine economic growth prospect in
its bid to control inflation through monetary contraction.
Analytical Review of Bangladesh’s Macroeconomic Performance in FY2011-12: Third Reading
58
OUTLOOK FOR FY2013
From all indications, it seems that inflationary pressure will sustain in the
upcoming fiscal year.
It is to be seen whether the successive bumper productions of foodgrains along
with high level of stock holding is going to bring down the level of food
inflation.
The fall in global foodgrain price is supposed to facilitate this process.
One the other hand, “cost push” brought about by the expected upward
revisions of energy products will possibly enhance the non-food inflation.
The government will need to energise its supply-side interventions (beyond
safety net programme and open market sales of foodgrains) to enable investment
and create more jobs to augment purchasing power of the consumers.
One of major tasks for FY13 will strengthening the BoP situation. Along with
streamlining the import demand, the government will have to enhance its
foreign exchange receipts by getting more export receipts, remittance flow, FDI
and most importantly, disbursement of foreign aid.
Maintaining a stable exchange rate will be a corollary of this exercise.
Analytical Review of Bangladesh’s Macroeconomic Performance in FY2011-12: Third Reading
59
OUTLOOK FOR FY2013
Our review maintained that the current employment situation at the aggregate
level is not so disconcerting as the investment scenario.
However, the need to generate decent jobs with reasonable wages, particularly
for the youth, remains another yet-to-fulfil promise of the present government.
Arguably, this has to do more than sending people abroad and providing
temporary employment through safety net programmes. Indeed, this has to do
more with the rejuvenation of the investment flow, as mentioned earlier.
The wide ranging reform initiatives espoused by the ruling party and the
government are yet to provide necessary support towards accelerating the
inclusive growth in the economy.
As the government approaches its finishing line, it has to concentrate on a
number of some quick-yielding and/or demonstratively visible reform
initiatives.
Analytical Review of Bangladesh’s Macroeconomic Performance in FY2011-12: Third Reading
60
OUTLOOK FOR FY2013
In fine, the government in its fourth year of tenure has to, on the one hand,
consolidate its achievement and, on the other, aspire for attaining new heights
during its last full fiscal year of the tenure.
To that end, it will have to target to keep the economy stable as it strives for
higher level of growth.
Admittedly, peaceful and predictable socio-political environment can provide
one of the most critical prerequisites for performing such feat.
Analytical Review of Bangladesh’s Macroeconomic Performance in FY2011-12: Third Reading
61
The full report is available here:
http://www.cpd.org.bd/html/IRBD_3_FY12.asp
Analytical Review of Bangladesh’s Macroeconomic Performance in FY2011-12: Third Reading
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