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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 4 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 5 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 7 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 8 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 9 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 Analytical Review of Bangladesh’s Macroeconomic Performance in FY2011-12: Third Reading 11 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 Analytical Review of Bangladesh’s Macroeconomic Performance in FY2011-12: Third Reading 13 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 Analytical Review of Bangladesh’s Macroeconomic Performance in FY2011-12: Third Reading 14 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%. Analytical Review of Bangladesh’s Macroeconomic Performance in FY2011-12: Third Reading 16 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? Analytical Review of Bangladesh’s Macroeconomic Performance in FY2011-12: Third Reading 17 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 18 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 21 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. Analytical Review of Bangladesh’s Macroeconomic Performance in FY2011-12: Third Reading 22 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 Analytical Review of Bangladesh’s Macroeconomic Performance in FY2011-12: Third Reading 23 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 24 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 Analytical Review of Bangladesh’s Macroeconomic Performance in FY2011-12: Third Reading 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. Analytical Review of Bangladesh’s Macroeconomic Performance in FY2011-12: Third Reading 28 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 34 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$51 million) in July-March, 2012 Lack of reinvestment interest of the existing foreign-owned companies The capital market is in a volatile state since its collapse in December, 2010 Numerous initiatives undertaken were by and large unable to restore discipline and stability FDI inflow and Outward Transfer: Net Result 700 571 565 600 553 551 593 500 400 300 288 200 100 18 -42 0 -100 Jul-Mar., 2010* -200 -300 -400 -277 Jul-Mar., 2011* Jul.-Mar., 2012* Foreign direct investment Outward transfers FDI inflow after deducting outward transfers Analytical Review of Bangladesh’s Macroeconomic Performance in FY2011-12: Third Reading 35 3. INVESTMENT SITUATION Less improvement in business enabling environment Adversities environment in business Problematic factors enabling Inadequate supply of electricity and gas and poor physical infrastructure High inflation and high lending rates of commercial banks Devaluation of local currency against US$ 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 36 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 39 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 40 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 43 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 44 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 45 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 47 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 48 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 49 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 50 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 51 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 52 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 55 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 57 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 62