International Financial Institutions

in Bangladesh Implications of Selected Policies for Agriculture Sector

and Rural Livelihood

Md Jahirul Islam

S M Ahsan Habib

Dhaka, November 2007

6/8, Humayun Road, Block B

Mohammad, Dhaka 1207, Bangladesh. www.dnet-bangladesh.org

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Acknowledgements

This research study was undertaken with the financial support of Oxfam, Bangladesh.

Daft version of this report was presented in a seminar and the final version has

benefited greatly from the comments of the seminar participants and Oxfam. The

authors are thankful to Dr Ananya Raihan and Dr Toufic A Choudhury for valuable

discussions. The authors are grateful to the participants of the focus group

discussions. However, authors are responsible for remaining errors and inadequacies

of the report.

Md Jahirul Islam1

S M Ahsan Habib 2

1 Founder Member of D.Net and Teaching Fellow, University of Bristol 2 Associate Professor of BIBM and Founder Member of D.Net

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Acronyms ACI: Advanced Chemical Industries ADB: Asian Development Bank BADC: Bangladesh Agriculture Development Corporation BB: Bangladesh Bank BKB: Bangladesh Krishi Bank BKB-RAKUB: Bangladesh Krishi Bank- Rajshahi Krishi Unnayan Bank BS: Block Supervisors BRAC: Bangladesh Rural Advancement Committee BRC: Banking Reform Committee BRDB: Bangladesh Rural Development Board BWI: Bretton Woods Institutions BWDB: Bangladesh Water Development Board CSO: Civil Society Organisation DAE: Department of Agricultural Extension DFID: Department for International Development ESAF: Enhanced Structural Adjustment Facility FCD: Flood Control and Drainage FCDI: Flood Control, Drainage and Irrigation FFW: Food for Work FGD: Focus Group Discussion FSAC: Financial Sector Adjustment Credit FSRP: Financial Sector Reform Programme FSRP TA: Financial Sector Reform Project Technical Assistance FY: Fiscal Year (July-June)

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GDP: Gross Development Product GOB: Government of Bangladesh HYV: High Yield Variety ICT: Information and Communication Technology IDA: International Development Assistance IFI: International Financial Institution IFDC: International Fertiliser Development Center IMF: International Monetary Fund IWRM: Integrated Water Resource Management KJDRP: Khulna Jessore Drainage Rehabilitation Project LCG: Local Consultative Group LDCs: Least Developed Countries MFI: Micro Financial Institute MoP: Muriate of Potash MSME: Micro, Small and Medium Enterprises NCB: Nationalised Commercial Bank NGO: Non Government Organisation OED: Operation Evaluation Department OMS: Open market sale PCB: Private Commercial Bank PFP: Policy Framework Paper PFDS: Public Food Distribution System PPTA: Project Preparatory Technical Assistance RNFA: Rural Non-Farm Activities SAP: Structural Adjustment Programme/Policy

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SAF: Structural Adjustment Facility SAPRI: Structural Adjustment Participatory Review Initiative SDR: Special Drawing Right SEDF: South Asia Enterprise Development Facility SME: Small and Medium Enterprises STWs: Shallow tube wells TA: Technical Assistance TRM: Tidal River Management TSP: Triple Super Phosphate USAID: United States Agency for International Development VGD: Vulnerable Group Development WDR: World Development Report WTO: World Trade Organisation WB: World Bank

If agricultural growth has such unique abilities to reduce poverty

then why hasnt it been more consistently realized across developing countries? - WDR 2008

I. Introduction

As the dependence on foreign aid to support budget deficit has declined during the

last decade, donor policies have come under close scrutiny in many deve loping

countries. Ownership of policies by the country, not by the International Financial

Institutions (IFIs) or donors, is now being considered to be a crucial issue to design

own policies and implement them more effectively. The impression in some cases was

that aid conditionality alone was inadequate in bringing about sustained economic

reform and reduction in poverty (Mahmud: 2006). In other cases conditionalities

reduced flexibility to fit with the dynamics of different sectors of the economy.

The theme of very recently published World Development Report (WDR) 2008 of the

World Bank is Agriculture for Development. After a long break detailed assessment

of agricultural sector and its role in development have been picked up by an IFI. As

the report aims at making an assessment on where, when and how agriculture can be

made an effective instrument for economic development, specially development that

favo[u]rs the poor, our exercise attempts to provide an independent appraisal of some

selected policies of IFIs in Bangladesh. Although some of the issues are already

known to the policy makers, reiteration will help drawing adequate attention to these

issues in future policy formulation.

WDR 2008 addresses three main issues. Firstly, it advocates the reversal of the

policies of the donors and governments that neglected agriculture. Secondly, the need

for increasing the asset of the poor and creating opportunities in rural non-farm sector

was underscored as effective instruments in using agriculture for development. Lastly,

the report acknowledges that for successful implementation of the development

agenda and to incorporate country specific conditions greater involvement of local

and national bodies in policy design and decision process is required.

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Are these concerns and findings new to us? In this exercise we have made some effort

to highlight that some of the impact of the policies (particularly those related to

environment or natural factors) are irreversible. Hence a reversal of policy does not

necessarily imply reversal of impact as well. On the second issue, one may refer to the

Handbook of Development Economics (Vol. 2) published in 1988, which provided

similar policy prescriptions in relation to reducing income inequality. The third issue

mainly refers to the ownership of policy agenda, which has been in the policy debate

throughout 1990s among the academics, policy makers and civil society members.

Policies of IFIs were often criticised because of (i) narrow focus or incorrect design;

(i) faulty timing, sequencing and coordination; (iii) inadequate attention to impact on

access to economic opportunities and income disparities at the micro level, and (iv)

implementation without enabling environment and social capital. In developing

countries most of the policies of the IFIs were devised to achieve certain

macroeconomic targets. One common objective of various reform measures was to

prepare the country for increasing global trade in a liberal trade regime and thereby

participating in the globalisation process. Various measures or programmes were

implemented to this end, which had bearing on the rural households. Nonetheless, it is

not very easy to properly track the impact of any policy, prescribed or funded by

IFI(s), at micro level - on individuals or households belonging to a certain class of the

society. This is because there are overlaps in policies and their implementation plus

policy domains are not clearly defined or demarcated. At the same time there may be

autonomous or unintended changes taking place in any specific sector (e.g.

agriculture) due to policies external to that sector or economy. There were always

beneficiaries and victims at the receiving end of policy reforms across nations and

within economy. For example, as a result of programmes undertaken throughout the

1980s and 1990s to implement these policies per capita income has gone up but with

widening gap between and within countries; indicators like life expectancy, health,

education all showing improvement but inequality in access to basic social goods

remained. Poor people living in the developing countries have considered being

unable to get the due share of the pie and in some cases were made worse off. These

phenomena posed a challenge to the national and international policy makers.

Formation of the World Trade Organisation (WTO) brought further challenge with

rapid pace of globalisation.

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In many countries people living in rural areas, earning their livelihood from

agriculture or related activities, have been at the losing end and are facing increasing

vulnerability to disaster due to the policies taken under the auspices of the IFIs

(Bryceson: 2004, Moss: undated). In sub-Saharan Africa Bryceson (2004) also

observed a tendency of deagrariarisation 3 and depeasantisation4 - a long term

effect of recent policy shift. In presence of fragmented market in the developing

countries many such people could not be benefited from overall economic growth that

was achieved as a result of implementation of market and sectoral reform

programmes. The income-(food) consumption relationship in market-based

development can be smooth (e.g. transition economies in East Europe). However, this

may not be the case for many least developed countries (LDCs). As the expected

trickle down effect did not take place, the process of marginalisation continued

despite higher macroeconomic growth owing to efficient resource allocation in these

countries.

Bangladesh Government has been implementing a number of reform measures across

various sectors of the economy since the mid 1980s in order to boost its economic

performance as well as to cope with the challenges posed by globalisation. As per

prescriptions, and financial and technical assistance of the Bretton Woods Institutions

(BWI) Structural Adjustment Programme (SAP) was initiated in Bangladesh during

the mid-80s and it dominated the policy agenda of the country over a decade. The

main objective of the SAP was to attain internal and external balance of the economy.

The World Bank (WB) played the central role in the materialisation of the SAP. The

International Monetary Fund (IMF) actively got involved in other areas, mainly in the

financial and monetary sector in tandem with the SAP. Reform measures were carried

out to minimize the gap between potential and actual outputs. Besides, regional IFI,

the Asian Development Bank (ADB), had also been an important player, given its

significant contribution as a donor. A number of programmes (and projects under

those programmes) have been funded after the SAP period by multiple bilateral (e.g.

3 Defined as a process of occupational adjustment, income-earning reorientation, social identification and spatial relocation of rural dwellers away from strictly agricultural-based modes of livelihood. 4 A specific variant of deagrarianisation whereby the economic capacity and social coherence of peasantries are being progressively undermined.

4

USAID, DFID) or multilateral donors working under the umbrella of Local

Consultative Group (LCG).

Apparently the broader objective of the SAP and other policy agenda was achieved as

a structural shift in almost all sectors of the economy was observed. Several studies5

were carried out to measure the macroeconomic and sectoral impact of these

measures. During post- implementation period Bangladeshs economy has experienced

5%-6% GDP growth on sustained basis, relatively low inflation, robust improvement

in manufacturing export and current account, and attained self-sufficiency in food

production. Under the broad macroeconomic reforms agenda undertaken during the mid

1980s and early 1990s, a series of measures were put into action in the agricultural sector.

The changes that took place in the agricultural sector were often not very easy to

quantify directly, as large part of the sector was still semi- or un-organised both for its

inputs and outputs.

Structural transformation in the rural economy of Bangladesh, induced by the

agricultural and non-farm sector growth and resulting livelihood opportunities, had

also had winners and losers. Social, institutional and economic barriers have restricted

abilities of poor people to take advantage of the new opportunities. Policies were mostly

designed to reduce the gap at the national level, but less or no attention was given to

inequalities within and between rural communities. The implication of this for rural

livelihood is not very clear. Greater emphasis on agriculture is valid as there is an

evidence of strong positive correlation among the rates of decline in poverty, growth

rates in non-farm livelihood opportunities and performance of agricultural sector

across regions in Bangladesh (Taufique and Turton: 2003). At the same time it was

opined that mechanisation and commercialisation in agriculture led to the observed growth

and generated in non-farm activities like technical services and the trade in equipment, spares

and agricultural products. But such opportunities are usually inaccessible to the poor. As well

as being excluded from new opportunities, there is also evidence to suggest that due to

increased dependence on market forces poor people are losing access to traditional

livelihoods6. For example, with a view to promoting commercial aquaculture Bank-sponsored

5 A synthesis is available in Bhattacharya and Titumir: 2001, other references were citied in section II. 6 Toufique and Turton (2003) stated that access to common property resources such as water bodies, grazing land, and forests was becoming more difficult, as better-off households sought de jure or de facto long-term leases to them.

5

Fourth Fisheries Project in Kurigram district restricted the access of the local community to

the lake to two months of the year, while they used to have round the year access in exchange

of paying a nominal charge. In any programme evaluation while achievements in macro

indicators receive relatively more importance, micro level analyses are mostly confined in

household income and very little on changes in rural livelihood because of measurement

complexities.

I.1 Study objectives

The emphasis of the current study can be justified by the vital role that agriculture

plays in the national production and its potentials for reduction of poverty. This paper

attempted to review micro-level aspects of various studies by looking at the performance

of the agricultural sector and changes in rural livelihoods during the post reform period.

This study has focused on the implications of some selected policies implemented

under the guidance and financial assistance of various IFIs for the rural livelihood.

The specific objectives of the study are to:

1. prepare a laundry list of policies and their objectives;

2. identify and examine the policies of individual IFIs relevant to agriculture and rural

livelihood;

3. analyse the implementation status of the policies directly or indirectly targeted

towards agriculture sector;

4. analyse implications of these policies on the livelihood of agriculture-dependent

households; and

5. develop an advocacy agenda for promoting interest of poor and marginalised

people.

Given common interest of the IFIs some of the reform measures had involvement of

multiple IFIs. Hence it is difficult to attribute the impact of those measures to any

particular policy package or IFI. Under The WB and The IMF policy package analysis

is centred around three main programmes: (i) the SAP (ii) Financial Sector Reform

and (iii) Trade liberalisation. Analysis of ADB policy focused on its involvement in

water management and rural credit. Some of these programmes were undertaken

under the shadow of Local Consultative Group (LCG) involving bilateral and

multilateral donors.

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II. Structural Adjustment Policy (SAP)

This section starts with listing the policies implemented in the agricultural sector

under the SAP. In the next section analyses of the impact on the rural households

were provided under two categories: (i) input market - captured changes in the prices,

use, profitability in crop production, land ownership and tenancy structure etc.; and

(ii) output market - captured consumption and food security.

Because of the SAPs extensive coverage across developing countries, which were

suffering from budget deficit, high inflation and balance of payment crisis on a

regular basis, the programme was evaluated from various angles in a large number of

countries including Bangladesh (Sobhan: 1991, Bhattacharya and Titumir: 2001,

Mahmud: 1997). Although there was short term success in some African countries it

was argued that as a result of implementation of IFI-prescribed policies levels of debt

deepened amid fluctuations in national output, particularly agricultural output. This

also indicated that increasingly less-capitalised peasant agricultural output varied

primarily with fluctuating rainfall and different environments rather than in response

to the promised high producer prices of structural adjustment. SAP and economic

liberalisation resulted in a plethora of changes in rural productive and marketing

infrastructure that often increased rather than reduced production risks. (Bryceson,

2004)

Nearly half of all households in Bangladesh are said to be poor and unable to meet

minimal household consumption need. Economic growth in the long run is expected

to generate sufficient employment and income to raise these people out of poverty.

Murshid (2001) argued that in the short term safety nets were often proposed so that

the worst symptoms of poverty, unemployment and food insecurity, arising from

temporary adjustment problem, were tackled.

In 1986-87 GoB adopted a medium-term adjustment programme administered by the

IMFs highly concessional but extremely conditional loans called Structural

Adjustment Facility (SAF). This was extended further for a three-year programme

under the Funds Enhanced Structural Adjustment Facility (ESAF) in 1990. The

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programmes that were implemented under the Facility involving various sectors of the

economy are commonly known as the SAP. Evaluation studies of the SAP with

regards to macroeconomic and sectoral performances suggest that the outcome of the

programmes in Bangladesh had been mixed.

Although the WB recognises that borrower ownership of programme is a primary

determinant of program success, this was not observed during the process of designing

policies under the SAP, as evident from lack of consultation with stakeholders. Since

more focus was given to improvement in macroeconomic indicators of the economy

views of stakeholders at the micro level e.g. poor people, farmers, women, small

enterprises etc. did not receive any attention. Lack of institutional mechanisms to

organise these groups left them unaware of the programme which had direct bearing on

their livelihood. Moreover, establishment of some degree of consensus among the

implementing agencies, line ministries, key interest groups in the country, and the

sponsors were not observed. The process of preparation of PRSP can be viewed as

recognition of the abovementioned concerns.

II.1 Policy chronology

While the SAP in Bangladesh was started during mid 1980s, reforms in agriculture

sector were initiated at the beginning of 1980s. A brief listing of these pre-SAP

measures would be useful to distinguish the impacts of various programmes. From the

beginning of 1980s various policy measures were designed under the import

programme credits. Under the SAP some of these measures were continued and

pursued vigorously than before. These measures insisted on market-oriented reforms

and were intended to enhance the production efficiency in the agricultural sector

(Table-1). Because of delay in disbursement of credit the programme had some

overlaps with the measures under SAP.

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Table 1: Policies related to Agriculture in Import Programme Credits Appro- ved

Disb- ursed

Justification Sector Specific Policy Issues

10/80 06/83 Shift of focus from industry and export promotion to agriculture. Support of policy reforms introduced or planned by the government to increase production efficiency and equity of foodgrain distribution. Provision foreign exchange for importation of raw materials, components and equipment to enable the industrial, construction and agricultural sectors to reach full production potential.

Greater budgetary allocation for minor irrigation, drainage and flood control; assurance of adequate supplies of diesel fuel and spare parts to ensure full operation of irrigation equipment; commission of project preparation study for the construction or additional bulk storage capacity for diesel in rural areas; provision of additional agricultural credit by the banking system; improvement of institutional shortcomings of the banking system establishment of additional branches, training of staff, simplification of lending procedures, credit availability for fertiliser purchases, recovery of agricultural debts; grater involvement of the private sector in the manufacturing of minor irrigation equipment and of maintenance and repair services; liberalisation of anti-hoarding regulations and laws, provision of bank credit to private traders to build storage facilities and hold grain stocks, abolishment of the Approved Grain Dealers and standardisation of private market weights to improve the private sectors marketing efficiency in grains; commission of a study to determine the countrys storage needs for foodgrains.

12/81 06/84 Support to increase the production as well as the efficiency and equity of foodgrain marketing and distribution. Expansion of the private sector role in import, domestic manufacture, sale and servicing of irrigation equipment to reduce the public sector involved in these activities.

Provision of incentives to farmers, reduction of price risks faced by the farmers and improvement in the distribution of key inputs to stimulate foodgrain production; stabilisation of foodgrain supply and consumer prices during lean seasons; reduction of subsidies for minor irrigation equipment; reduction of budgetary impact of the foodgrain subsidy and procurement.

06/84 12/86 Further initiatives to improve the effectiveness.

Recovery of operating and maintenance costs from beneficiaries in major irrigation policies; improvement of utilisation and maintenance of minor irrigation equipment.

Source: Bhattacharya. and Titumir (1998)

The Policy Framework Papers (PFP), prepared by the Fund and the Bank, highlighted

that proposed reforms under the programme were aimed at improving efficiency of

resource use, enhancing the role of private sector, and realising higher rates of

domestic savings and investment. In order to achieve those a set of measures were

prescribed that include changes in price incentives; simplification of investment

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regulations; strengthening of tax policy and administration; improvements in financial

management of public enterprises; greater reliance on market oriented monetary

policy instruments; intensification of recovery programmes of non-performing bank

loans; flexible exchange rate management; and trade liberalisation.

In relation to agricultural sector various priority measures were considered. The most

important elements of the reforms in Bangladeshs agricultural sector during this

period were reduction of subsidy, maintaining adequate producer price incentives and

increasing the participation of private sector in the procurement and distribution of

inputs. These were done following the recommendation of the WB in order to ensure

greater reliance on private financial and managerial resources. Table 2 summarizes

the policies formulated and implemented under the SAP.

Table 2: A Summary of the Structural Adjustment Policies Related to

Agriculture and Food POLICY OBJECTIVES TARGETS

STRATEGIES AND MEASURES

Public expenditure in agriculture

Improvement in agricultural infrastructure, scale and efficiency of public investment in agriculture and water resource management

Evaluate the needs in irrigation, water management and flood control, implement recommendation of study and allocate public fund accordingly. Removal of subsidies on equipment

Institutional Reform

Greater private sector involvement in the distribution of agricultural inputs and equipment to farmers

Reorient the role of BADC and BRDB. Increased private sector involvement in import and distribution of irrigation equipment, water, fertiliser and seed. Rationalise tax structure on agricultural equipment imports.

Food Policy

Improve public domestic procurement and distribution operation. Greater involvement of private sector in internal and external foodgrain marketing.

Implementation recommendations of the National Committee of Rationing as approved by GoB. Unify ration prices in various channels; phase out subsidies, except for well-targeted programmes serving the poor; and review open market sale policies. Introduce floor price for farmers and support it with effective domestic procurement. Remove restrictions on private grain storage and inter-district trade. Allow foodgrain exports, as agreed with food aid donors. Permit foodgrain imp orts by private sector on same basis of official imports.

Fertiliser Pricing Policy

Eliminate economic subsidy on fertiliser prices.

Periodic review and adjustment of fertiliser prices to reflect world market prices and allowing private dealership.

Source: Compiled from Bhattacharya and Titumir (1998)

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Most of these measures were targeted towards input market of agricultural sector. The

significant ones were (i) allowing private dealers to procure fertiliser directly from the

factories; (ii) transfer of ownership of tubewells from BADC to farmers or

cooperatives, (iii) switching from the rental programmes for minor irrigation

equipment to a sales programme, and (iv) permitting import of engines and pumps

along with removal of standardization restriction tha t previously limited the choice of

makes and models. (see also Table 3)

Table 3: Chronology of Policies: Agricultural Input Markets Actions Time

period Remarks

Fertiliser Market 1. BADC withdrew from retail and wholesale markets at thana level & primary distribution points

1978-83

Significant response from private traders

2. Licensing requirement was abolished and restriction on movement removed (except for eight-kilometer border zones with India)

1982-83

3. Deregulation of fertiliser price took place 1982-84

Beginning of real competition

4. Private traders directly purchased from factory gates and port points

1987 Vigorous response from traders

5. Free import from world market, with special credit support provided to private importers

1992 Good response with fear of oligopoly

6. Partial reversal of reform due to fertiliser crisis 1994-95

Lack of monitoring of private dealers

Irrigation devices 1. BADC sale of low-lift pumps and tubewells to private parties backed by special credit arrangement for purchasers

1980-85

Good response from farmers

2. Restriction on import of engines and pumps was withdrawn; private sector was allowed to import

1987 Drastic fall in prices of engines

3. Standardization restrictions limiting makes and models were removed

1988 Wider choice with greater price range

Power tillers, Pesticides and Seeds 1. Restriction on power tiller import and the standardization requirement were removed

1989 Modest response

2. Import of power tiller/tractor was made duty-free, along with credit support for purchase of these machineries

1995 Vigorous response

3. Restriction on import by brand names was liberalized for pesticides

1989 Modest response

4. New seed policy provided for privatization of seed production beyond the foundation stage. Closing down BADC operated seed retail centres.

1992 Restrictions remained on import of rice, wheat, potato, jute and sugarcane seeds, to prevent cheap poor quality import.

Revised Fertiliser Control Ordinance for quality control and regulation of fertiliser price

1995 Weak enforcement

Source: Compiled from Ahmed (2000) with some updates.

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Besides abovementioned policies some other macroeconomics and sector specific

policies had impact on rural producer and consumer households.

Exchange rate rationalisation devaluation of overvalued local currency were

expected to encourage agricultural export, at the cost of expensive imported inputs

and food. More expensive inputs could slow technological change while cheaper

exports make agriculture more competitive. However, there are debates on the net

effect.

Trade liberalization policies - reduction of tariffs and non-tariff restrictions

occurred across the board and had impact on import of agricultural input and food

grains (specifically in the face of shortages). Compared to manufacturing,

agriculture received much less protection, with unfavourable domestic terms of

trade.

Liberalisation of monetary/credit policies net availability of credit for

agriculture has dwindled during port-reform period. More recent trend on this has

been discussed in section IV under financial sector reform.

Reform of the Public Food Distribution System - rural rationing7 was abandoned

and there was a policy shift towards distribution through safety-nets (FFW, VGD).

Subsidized sales from the PFDS have dwindled; stabilization operations like OMS

have been retained. Other measures include withdrawal of restrictions in private

trade (e.g. removal of anti-hoarding laws and stock-keeping rules), a shift from

mill-gate procurement by the PFDS to open tendering and further opening up of

the private market to trade, first by allowing private wheat imports and then

extending this to rice as well.

II.2 Impact of SAP measures

The impact of the measures and programmes implemented to fulfil the objectives of

SAP on rural livelihood was analysed in the following sub-sections separately for

various subsectors of agricultural sector. These subsectors include input markets,

output market, land market and labour market.

7 Allegedly, 25% subsidy on sales was misused and the intended beneficiaries were not receiving this benefit.

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II.2.1 Agricultural input markets

Before analysing observed impact of the policies, identification of policy-outcome

linkage for some selected measures, on an a priori basis, along with expected effects

on input use and crop choice is useful. Based on Ahmed (2000), a summary of these

was presented in Table 4.

Table 4: Policy-Outcome Linkages Policy Meso-level effects Effects on input use

and crop choice Direction of profit

Reduction of subsidy on fertiliser

Increase in fertiliser prices

Reduced fertiliser consumption

Decrease

Lowering of retail prices due to increased competition

Increase in fertiliser consumption

Increase Privatization of fertiliser distribution

Increase in price instability due to alleged oligopoly at dealers level

Sub-optimal choice of crops

Decrease

Reduction of subsidy on irrigation

Increase in the price of irrigation water

Shift away from irrigated crop

Decrease

Wider choice of crops, especially HYV rice

Increase Withdrawal of restriction on private sector import, and on brands/makes

Wider choice and increased competition, leading to increased investment in irrigation and decrease in price of irrigation water

Expansion in irrigated area, leading to wider choice of cropping pattern

Increase

The abovementioned linkage in Table 4 suggests that reform measures affect the price

variable at meso- level, which influences the demand for inputs, cost of production and

choice of crop. These ultimately determine crop-sector profitability. As more than one

measure was implemented for each input and since the directions of impacts of these

measures on the profitability are not same, it is difficult to figure out net impact. This

becomes more ambiguous when one takes into account more than one input at a time.

Hence only ex-post analysis can be useful in this regard.

Zohir (2001) reported that at macro level these measures are believed to have reduced

budgetary burden of the government and helped maintaining price stability during

decline in domestic production. But one can argue that the same private sector failed

to offer the stability in recent years. They allegedly deviated from fair market play and

were seeking oligopoly (or syndicated) rent due to absence of good governance and

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lack of able monitoring capacity. Since early 1980s significant increase in

mechanization of crop production took place, largely facilitated by the liberal policy

towards importation of farm machinery and farm credit to support it.

II.2.1.1 Fertiliser Market

As expected, nominal prices of fertiliser have gone up after liberalisation. But it was

considered to be appropriate to express the prices in real terms in order to ascertain

the real changes. The real prices of fertiliser (expressed as ratio of nominal price of

fertiliser to that of rice price) have declined in most cases. (Table 5)

Table 5: Ratio of Fertiliser Prices to Paddy Prices

HYV Aman HYV Boro Inputs 1979-81 1990-92 1979-81 1990-92

Urea 1.09 0.82 1.13 0.90 TSP 0.98 0.98 1.02 1.18 MoP 0.76 0.81 0.78 0.99

Source: Zohir (2001)

Although liberalisation of fertiliser marketing started in the early 1980s subsidy on

BADC-imported TSP and MoP continued till the end of 1991. Administered factory-

gate urea prices produced in the public sector industry could also be considered as

implicit subsidy on urea8. Therefore, during the post- liberalisation period nominal

price of fertiliser might have increased at a slower rate than that of rice price, causing

real price to decline. Based on IFDC data Zohir (2001) found that spatial differences

in urea price have increased in number of districts, particularly in the north-west

region of Bangladesh. In contrast, price differences in MoP have declined for most

districts during the 1990s, as compared to the early 1980s.

Using monthly data it was also observed that deviations of retail price of the peak

period from its annual average price were declined after the initial introduction of

private dealership. The deviations remained quite low until the introduction of private

import of fertiliser. Since then price volatility had increased, allegedly due to presence

of oligopoly. However, strict monitoring to regulate the operations of the dealers

8 Econometric analyses by Ahmed (2000) and Zohir (2001) found that a unit increase in the factory-gate price increased the retail price 1.01-1.2 unit.

14

appeared to have ensured lower price deviations for urea since FY1997. Since such

monitoring is not in place for imported fertiliser, and due to variations in world prices,

price volatility has increased for TSP and MoP. (Zohir: 2001)

Regarding use of chemical fertiliser it was observed that for HYV boro paddy

production the intensity of (total) fertiliser use per unit of land has increased, along

with output per unit of land. But on the net the intensity of fertiliser use per unit of

output has declined marginally.

In a survey of 199 farming households, 88 from Chandina and 111 from Madhupur,

on the trend in the use of chemical fertilisers in the last 10 years (1989-99) about 97

per cent of the farmers believed that the use of chemical fertilisers has been increasing

over the decade. Declining soil fertility (47%) and lower yields (45%) were singled

out by the farmers to account for the increase in use of chemical fertilisers (Toufique,

1999).

II.2.1.2 Irrigation market

In the absence of systematic data on prices of irrigation equipments and water, and

existence of various modes of irrigation as well as pricing arrangements it was very

complicated to capture the changes in this market. This section mainly focuses on

irrigation equipments; and water management issues were discussed under the ADB

policy later in the report.

While transfer of ownership, from rental to sale of irrigation equipment by BADC,

may have facilitated more efficient use of the pumps, and thereby, expansion of the

(per unit) command area, the transfer also led to increase in irrigation price. Such

ownership change, however, had only marginal effect on the expansion of irrigation in

the country due to monopoly of BADC over procurement of irrigation equipments and

inefficient domestic manufacture of diesel engines. (Zohir: 2001)

Liberal policy towards importation of farm machinery and withdrawal of restriction

on brands made significant increase in mechanisation of crop production. This

provided a wider choice of irrigation equipment at cheaper prices, and thereby,

promoted investment in the minor irrigation sector. However, such action had their

15

own downside, which had long term effect on the livelihood of people living in those

areas. Zohir (2001) observed that

1. Excessive extraction of ground water is believed to have led to drying out of

aquifers during the dry season. In parts of the country, this has led to digging the

well deeper, and often switching from shallow to deep tubewells. Such

technological switch necessitates significant institutional rearrangements.

Moreover, irrigation with deep tubewell at the latters economic price, is yet to

prove financially viable. These two aspects remain to be resolved in the future.

2. Extraction of ground water, in excess of the natural recharging capacity of the

aquifers, is also believed to have led to the arsenic problem, which is considered

to be a major health disaster during the recent past. It is therefore important to

bring in balance between the alternative uses of water and between alternative

sources of water.

II.2.2 Overall Profitability

As a result of the abovementioned changes in the input markets and prices an increase in

their use and consequential increase in output and profitability are expected. Ahmed

(1995) measured the impact of input market reforms on the production of rice in

Bangladesh using before-after econometric approach and estimated that reform measures

contributed to approximately 20 to 32 per cent of the increase in production. This

increase is primarily attributed to the impact of reform on fertiliser consumption and

private sector irrigation development.

Based on the analyses of Zohir (2001), it was observed that while revenue had

increased by 40 percent over a decade, net returns on a cash cost basis had increased

only by about 17 to 20 percent. During the same period, crop-sector GDP at constant

prices (1984-85) increased by about 33 percent. Over the period, dependence on

purchased inputs both labour and non- labour increased; thus, cash returns to the

farming households increased at a lower pace than growths in either quantum of

production or the total value of produce. Returns to aggregate crop cultivation on a

full-cost basis however registered an increase of more than 75 percent. The latter is

indicative of increase in the use of labour for non-crop (and possibly, non-farm)

activities by the farming households. (For details see Annex Table A)

16

Further analyses reveal that increase in crop-sector profitability has dampened by late

1990s. A comparison of returns between 1990-92 and 1997-2000, upon changing a

limited set of variables (on which information was available), shows net returns on

per unit of land, in nominal terms, to have increased at the most by less than 1 percent

on full-cost basis. This is primarily because the wage rates have increased by more

than 25 percent over the period. Although price of urea fertiliser relative to price of

rice did not increase, the relative prices of other two varieties of chemical fertiliser

have gone up after 1992. Overall fertiliser costs have increased by more than 50

percent and irrigation costs have increased by about 10 percent. Increase in the

irrigation price paid by the farmers, who had already adopted the technology,

adversely affected their profitability. In contrast, the prices of most crop-sector

products have only marginally increased. In real terms, returns on land declined by

more than 25 percent, which largely reflects the persistent decline in terms of trade

against crop sector in Bangladesh. Given that physical quantity of output produced per

unit of land did not increase significantly over the years, the finding on decline in real

profitability of the crop sector during the 1990s remains valid.

Overall, it was argued that early adopters of modern technology had reaped higher

benefits during the initial years, which declined with policy reforms later on; and the

policy reforms helped expansion of modern technology to new areas (due to reduced

investment cost) where the farmers derived positive benefits.

II.2.3 Land ownership and Tenural Arrangement It is not easy to identify the extent to which changes in the pattern of land ownership

and tenancy in rural households can be attributed to policies related agricultural

sector. The agricultural sample survey 2005 shows that households owning no land

have increased by about 5 percent annually between 1996 and 2005 in rural areas. In

2005 10.66% of rural households were reported to be absolute landless, while in 1996

and 1983-84 the figures were 10.18% and 8.67%. Share of marginal (0.05-0.49 acre)

holdings in total holding of rural Bangladesh increased from 24.06% in 1983-84 to

28.45% in 1996 and by 2005 staggeringly increased to 59.39%.

17

The land tenure situation has also undergone substantial changes. The composition of the

owner and tenant farms has remained almost the same at 60:40 ratio. Most of the tenants

are owner-cum tenants who have some land of their own, and rent-in some more land for

better capacity utilisation of the farm establishments (family workers and draft animals).

Like previous decades the average size of tenant holdings has remained higher than that

of owner holdings. The proportion of area under tenancy has, however, increased from

17 per cent of the operated area in 1983-84 to 22 per cent in 1996. Agricultural sample

survey 2005 categorised 28% of the total operated area of rural farm households as land

taken from others. Zohir (2001) commented that this change might be due to an

increase in area under absentee landownership with the rapid rural-urban migration of

the rural population, and the abandonment of marginal landholding by the functionally

landless farmers in favour of taking up rural non-farm occupations by the resource-

poor households.

Census data also showed a dramatic change in the structure of tenure arrangements. The

sharecropping tenancy, which provides disincentives to agricultural investments and the

adoption of input-intensive new technologies, is giving way to different fixed-rent

tenancy and medium-term leasing arrangements. The area under share tenancy has

declined from 74 per cent of the tenanted area in 1983-84 to 62 per cent in 1996.

Murshid (2001) based on small survey, carried out a decade apart (1988-89 and 1999-

2000), on 100 households in two villages found that

All six classes (farm labour, nonfarm labour, poor farm, medium farm, nonfarm

medium and rich) of households registered a decline in land owned but this was

larger amongst the poorer sections.

There has been a general decline in the incidence of land lease by the sample

households. Thus 47 percent and 33.3 percent reported renting- in and sharing- in

land, respectively, in 1988 compared to 27.5 percent and 17.6 percent in 2000.

Poorer groups have assumed a larger share of the land lease market in 2000

compared to the situation a decade ago. This is consistent with the previous census

findings. Inflow of remittance in the poor household might have some

contribution to this phenomenon.

18

II.2.4 Impact on food security The discussion in this section is based on the analysis obtained by Murshid (2001)

from panel data survey mentioned earlier. Murshid reported considerable variation in

rice consumption by socio-economic groups for 1988-89, with the non-farm labour

group at the bottom of the pile. On the other hand rice consumption is virtually

evened out during the post harvest period (with the farm labour group consuming the

most). In part this is likely to be 'compensatory consumption' but in addition it could

be due to meals provided to farm labourers as part of payment and the additional

calorie requirement because of hard physical work involved. The main conclusion is

that excessive variation in staple food (rice) consumption across groups and over

seasons is an indication of food insecurity. The variation in vegetable consumption on

average is small. It is interesting to note however that the poorer groups again

consume much more vegetable compared to the rich during the post-harvest period.

There is small variation across groups in fish consumption as well, except during the

post harvest period.

By 2000 rice consumption has changed little for most groups. For the farm labour

group, however, rice consumption has decreased noticeably but appears to have been

well compensated through consumption of other foods. In fact the main change that

appears to have occurred in the sample population is a widening of the food

consumption basket without much change in cereal consumption. In the sample

households a general increase in consumption of meat, fish and pulses was observed

and this may be an indication of better food security. However, the report did not

investigate further to find out factors respons ible for such change.

Besides the longitudinal survey, Murshid also undertook Focus Group Discussion

(FGD) in two villages held in December, 1999. Although the main objective of the

FGDs was to gather information on food-security situation, villagers also highlighted

the issues related to agricultural input market. All participants were briefed about

various measures related to input prices, subsidies, abolition of the rationing system

and introduction of VGD and test relief, and liberalization of food imports. In the first

village (Volta) 25 participants expressed their opinion, while in the second (Polipara)

a total of 21 people attended the FGD. Main findings of the FGDS were reported

below in two Boxes.

19

Village: Volta, Bogra

With regard to fertiliser availability, an improvement in the situation was reported

as it is now possible to get it quickly and easily, although the price was a little "too

high".

Serious concern was raised about quality of fertilisers available with the private

dealers as farmers can never ascertain this.

Farmers welcomed the new policy of privately owned tubewells that replaced the

old BADC-regulated system of cooperative ownership and block-formation for

distribution of irrigation water. At the same time they complained that costs of

irrigation were "too high" although over the years the price of agricultural

equipment had come done substantially because of import liberalization.

Mechanization has increased rapidly.

In case of irrigation equipment and spares also farmers were no t confident about

the quality.

Although in principle the policy of farm price support through paddy procurement

by the government is meant to stabilise farm prices, most participants felt that the

farmers do not get the benefit as most purchases are made from traders and

millers, virtually preventing access of the small producers to such facility.

There are more absentee landlords now than before resulting in more land

available for renting in at fixed rates - a form of access to land that has expanded

relative to the traditional 50 percent share-cropping system. This finding is similar

to the national level census observation reported earlier.

20

Village: Polipara, Bogra

The replacement of rural rationing system by a greater emphasis safety net

programmes, such as Food for Works, Vulnerable Group Development, Test

Relief etc., has benefited the poor.

The participants expressed their satisfaction with the fertiliser distribution system

but opined that its pricing policy should be reviewed taking into account farmers

affordability. The worry about the quality of fertiliser was also raised seriously.

Satisfaction was also expressed with regard to the irrigation policy that allowed

private ownership and reduced prices of equipment and thereby serving to lower

water charges. However, due to involvement of too many individuals in the

management, deep tubewells were not operating well under private management

and often resulting in conflicts.

As before, the participants noted the severe constraints faced in selling paddy to

procurement centres.

Agricultural yields have improved (both paddy and vegetables) and culture

fisheries have expanded significantly. However, the participants expressed their

concern about harmful environmental effects of chemical fertiliser and pesticide

use, especially on fisheries.

The main tenurial forms are cash rent for a season or some other period (e.g.

several years) - longer term agreements are now more popular. Traditional system

of share cropping (on 50 percent basis) has become rare.

Following were the summary observations from the survey and FGDs:

At micro level, access to food improved significantly (especially of the poor)

through growth in non-farm income, availability of credit, improved access to the

land market and employment demand.

There was no change in per capita land owned, but inequality in per household

land ownership has increased.

Poorer groups have assumed a larger share of the land lease market compared to

the situation ten years ago.

There has been quite a sharp decline in livestock wealth, except for the bottom

(farm labour) group in both villages.

21

The survey also brought to the light two serious types of market failures. These are

related to the inability of the market to:

(a) ensure that farmers have access to adequate information about the quality of

agricultural inputs like fertilisers and machinery; and

(b) take into account the substantial negative impacts on the environment, especially

on soil, surface and ground water.

Findings from the latest (October 2007) FGDs on various issues were outlined in the

penultimate section of this report.

II.2.5 Impact on Labour market

Increase in landless households has contributed to increased labour supply in the rural

economy. Crop sector did not have the ability to absorb the increased supply of

landless labour due to adoption of labour-saving technology. There was an increase in

the demand for labour in the irrigated area during the peak season only. Fluctuations

in income for these households (between peak and off-peak season) may make them

vulnerable to any negative shock (e.g. flood, inflation) during off-peak season.

Murshid (2001) reported a significant shift from the traditional dominance of daily

hired workers to contract labour, while total demand remained unchanged.

Despite an increase in real wage for agricultural labour over the decade of 1990s,

proportion of labour-selling households have declined over time. Households with

agricultural labour have also declined from 22% in 1987-88 to 12% in 2000 (Hossain:

2002). Consequently agriculture wage income in total household income has declined

sharply between these periods, from 11% to 4%. In the rural Bangladesh households

with agricultural labour was 36% in 1996 and declined to 28% in 2005.

The above mentioned findings guide us to think that resource poor households mostly

moved to rural non-farm activities (RNFA) and might be to some extent migrated to

urban areas. Estimates presented in the Preliminary report of agricultural sample

Survey 2005 show that in rural areas the ratio of farm households to non-farm

households was 66:34 in 1996, which has declined to 59:41 in 2005. During this

period farm holdings increased at an average rate of 2.58% annually, while non-farm

22

holdings increased by 7.36 % per year. The ratio of involvement of rural workers in

agriculture to that of RNFA was about 60:40 in 1987-88 and by 2000-01 the ratio

turned out to be 44:56. Data from Labour Force Survey 1995/97 show that more than

two-thirds of the non-farm labour force were salaried or wage workers. Latest labour

force surveys also revealed that although over all labour force participation in

agriculture, forestry and fisheries has declined from 51% in 1999-2000 to 48% in

2005-06, the changes are significantly different between male and female labour

forces. While male participation in the sector declined from 52% (1999-00) to 42%

(2005-06), female labour force registered a significant increase in participation in this

sector from 46% to 68%. Male labour force increased their participation mainly in

activities related to transport, storage, manufacturing, trade, hotel and restaurant.

RNFA were the result of backward and forward linkages of development of

agricultural sector. Firstly, large-scale market and trade liberalisation including

agricultural input and output; secondly, adoption of technology and mechanisation in

agriculture; and lastly, agricultural diversification were three major driving forces for

the growth in RNFA (Mandal and Asaduzzaman: 2002). Growth in equipment

manufacturing, support services for farm equipments, trade in agricultural inputs, and

grain storing, trading, milling resulting from increased cereal production, are some

areas of RNFA. At the same time development in poultry, fishery and plant nursery

demanded higher trading in feeds and rearing equipment. Development in rural

infrastructure and growth in rural household income also created demand products

and services offered by rural non-farm sector. However, Murshid (2001) argued that

with regard to non-farm incomes, there has been a substantial increase for most

people although the better-off groups have tended to benefit more. One can relate this

finding with the access to formal credit market. Although poor households had

increased access to microcredit, they have very limited access to medium scale credit

from the banks. Hence they hardly could go for investment in small and medium

enterprises belonging to non-farm sector. In the process of these dynamic changes in

the RNF sector, people engaged in traditional residual activities (making puffed rice,

pottery, shoe repairing, barber, etc) were being marginalised. Mandal (2003) pointed

out that they also face seasonal income fluctuations and sometimes are highly exposed

to though competition from bigger players.

23

II.3 Trade liberalisation, shrimp culture and environment

In order to address balance of payment problem the SAP advocated reduction of anti-

export bias in the tax structure, tariff rationalisation and trade liberalisation,

incorporation of flexibility in the exchange and interest rates, privatisation, and greater

dependence on market-based price mechanism reflecting the comparative advantages of

the country.

To realise the policy objectives market determined interest rate was introduced in the

early 1990s to channel credit to the most productive sector of the economy; financial

sector has been decontrolled to allow efficient allocation of credit and thereby increasing

efficiency of investment ; the exchange rate system moved from fixed to managed float

and ultimately free floating system; the national currency was made partially convertible

in the current account; and the tariff rates have been significantly reduced and

rationalised along with removal of some non-tariff barriers.

At macro level an improvement in current account deficit was registered during post-

SAP period. It has been also argued that the income distribution has become more

skewed, while a limited member of people benefited from the export promotion.

There is a growing apprehension that as Bangladesh pursued export- led growth

strategies, important structural changes took place in the economy. Naturally substitution

effects of trade liberalisation measures favoured export sector of the economy. The

concomitant changes in allocative efficiency and relative prices resulted in

environmental degradation. Moreover, as resources switched from non-tradable to

tradable sectors of the economy and due to changes in production and cropping patterns

in response to the adjustment policies, resource degradation started as by-products of this

particular pattern of growth. The third Policy Framework Paper (PFP) of the SAP in

1990/91-1992/93 first included environmental concern as a policy objective in the

context of Bangladesh.

Very few evaluative studies to examine the environmental dimensions of trade

liberalisation or SAP in Bangladesh are available. This section heavily relies on the cost

benefit analysis made by Bhattacharya et al (1999).

24

II.3.1 Policy and measures

In order to pursue an export-led growth strategy the shrimp sector was offered

incentives: zero tariff access of imports, fiscal incentives for exports, income tax

rebate, speedy customs clearance, cheap credit, leasing of private and khas land in

favourable terms and institutional support for setting up downstream factories.

Shrimp culture in Bangladesh received crucial support from the World Bank when it

extended a credit amounting to SDR 20.6 million to Bangladesh for a Shrimp Culture

Project in 1985. In the project outline it was mentioned that the project could not have

any detrimental effect on the environment. Intensification of shrimp culture would take

place only in areas where it already exists. Neither the existing land-use pattern nor the

present ecological balance would be changed. Positive effects would be achieved

through the elimination of salt water seepage into adjacent agricultural land, by

construction of appropriate boundary embankments, and by efficient and timely water

exchange to flush out salt from soils for paddy cultivation. The further spread of

extensive shrimp-farming operations into agricultural and forest lands would be

counteracted by the revision of Government policies on salt-water intake and the leasing

of public lands and by demonstrating the financial rewards of intensified shrimp culture.

The project would not cause harm to other riparian States nor would it be harmed by the

use of water by such other riparian States (World Bank: 1985 cited in Bhattacharya et

al).

Extensive shrimp cultivation was undertaken to take the benefit of conducive policy

environment within the country and emerging opportunities in the global market. The

government provided crucial support to the sector in terms of acquisition of land, leasing

of khas (state-owned) land to shrimp farmers, and providing financial incentives for the

production and processing of shrimp.

25

Table 6: Shrimp Culture in Bangladesh: A Summary of Environmental Concerns

ACTION CONSEQUENCES FOR DEVELOPMENT

ENVIRONMENTA L IMPACT ON

INTERVENTION RECOMMENDED

Land lease by outside entrepreneurs

Use of land only to maximise short-term profit without concern for long term sustainability

- deforestation - destruction of mangrove ecosystems (biodiversity) - destruction of alternative source of livelihoods

a. Stakeholders participation in the management of shrimp farming and stricter implementation of existing laws b. introduce zoning and declaring certain parts of the country to be non-shrimp area

Lease of government (khas) land for shrimp culture

Traditional rice culture replaced by shrimp culture

- disentitlement of landless - intensification of poverty - prevalence of environmentally unfriendly practices

a. enactment of laws ensuring participation of landless people in any use of khas land

Salt water penetration within embankment for substantial period

Increased salinity in the area Gradual degradation in the quality of land and soil-nutrient resulting in accumulation of sodium chloride affecting rice production

a. develop land use policy and environmental guideline for shrimp culture b. develop optimal practices for rice-shrimp mixed culture

Use of extensive methods of shrimp cultivation causing inundation of large tracts of land

Large area remaining under water for substantial period of time

a. destruction of homestead cultivation, fruit orchards b. rupture in the subsistence cycle

a. encourage semi-intensive method of cultivation b. zoning and area mapping

Indiscriminate fish fry collection

Destruction of fish biodiversity and increased exploitation of preferred species

Over fishing Develop shrimp hatcheries

Source: Bhattacharya et al. (1999)

The WB approved the shrimp culture project in 1986 costing US$36.7 million. It was

evaluated that the project was largely successful in achieving the objectives. The

report has the following to inform about its environmental impact (World Bank,

1994): there are no environmental effects caused by the projects. The land use

pattern and the ecological balance have not changed as a result of project

interventions. On the contrary, some of the diverse effects which existed under pre-

project conditions, such as water- logging and uncontrolled cuts in embankments for

the constellation of sub-standard inlet structures, have been minimised or eliminated

by the project interventions. No mangrove forest has been destroyed as a result of the

project.

26

II.3.2 Impact of shrimp culture Evaluation of the impact of shrimp culture normally estimates the benefits accruing in

the form of income/profit, employment, etc. resulting from bringing land under shrimp

culture and compared with the erstwhile traditional practices in those lands. But the

important question in this regard that should be addressed is to analyse the distribution of

benefit and loss. It was thought that most of the incremental income was usually accrued

by the non- local or foreign shrimp entrepreneurs and local peasants could hardly claim

any share in this. These have affected the distribution of income in those areas,

accentuating social as well as economic disempowerment of the local poor people.

Some of the contentions issues with regards to negative externalities of shrimp culture

are as follows:

the coastal areas in the south (where commercial export-oriented shrimp culture

has mainly expanded) have suffered environmental degradation;

shrimp culture increased salinity of soil, canals and the ponds within the polders;

higher salinity levels have reduced the land area available for grazing and,

consequently, the scarcity of fodder has led to a reduction of livestock;

there has been destruction of irreplaceable mangrove forests in land leased for

shrimp culture in the coastal belt of Chittagong because of high salinity;

shrimp culture has also adversely affected the potential crop-mix, yield, cropping

intensity, crop calendar, and the overall cropping pattern in the areas concerned;

slower decomposition of rice roots in shrimp-cum-paddy fields has reduced soil

quality and productivity, and increased the chance of 'stem root' virus;

greater water exchange for shrimp culture has increased the rate salinisation in

the fields, which may in the long-run reduce the possibilities for the coexistence

of flooded rice and shrimp culture and subsequently give rise to water

management problems; and

there was also growing landlessness and increase in shrimp related violence

It is very difficult to properly quantify the above mentioned externalities in any cost

benefit analysis. But it can be said that the social welfare gains were significantly

reduced as a result. These features also contradicted the concept and objective of

sustainable development.

27

As a localised industry development in the shrimp farming has created employment and

income generating opportunities, particularly for the women, in shrimp farm, processing

units and also in upstream and downstream activities, such as services, transport,

catching of shrimp fries etc. (Toufique and Hasan 1998; Manju 1996 cited in

Bhattacharya et al). This has also led to displacement of labour from agriculture related

activities. Changes in the land-use pattern deprived share-croppers, whose livelihood

traditionally depend on leasing and renting of cultivable land, of access to the major

productive resource, making them unemployed (Manju 1996). Moreover, shrimp

cultivation for longer period made some areas unsuitable for some traditional economic

activities, like cattle grazing, poultry-keeping, household vegetation and social forestry.

Information about the net impact on employment creation is nonetheless inclusive.

Case studies in the village of Chalbunia reveal that the percentage of the population

cultivating rice decreased from 33 to 13 per cent, whilst those involved in shrimp-

cultivation increased from 20 to 32 per cent (Manju: 1996). It was also reported that

post-shrimp income level for local peasant households was only 62 per cent of the pre-

shrimp level.

Comparing "non-shrimp" Polder No. 22 of the Bangladesh Water Development Board

(BWDB) with "shrimp" Polder Nos. 20 and 21, Adnan (1991) found that during the

period 1987-90 half of the jackfruit and mango trees were destroyed and one-third of

cattle herds had disappeared in the shrimp polders. It was opined that these polders might

eventually become saline deserts.

To tackle problems associated with shrimp cultivation the government initiated a number

of initiatives to contain the negative impacts. However, government regulations have

been criticised on grounds of their inadequacy, weak enforcement and insensitivity to

environmental concerns. Asaduzzaman and Toufique (1998) opined that it was the

unplanned nature of shrimp cultivation that was at the root of the resource degradation.

Provided shrimp cultivation can proceed in a planned manner, much of the resulting

environmental damage might be averted.

28

Evaluation of the World Bank Shrimp culture project Banks own evaluation study of the project in 1994 stated that the project was largely successful in achieving the objectives. ..there are no environmental effects caused by the projects. The land use pattern and the ecological balance have not changed as a result of project interventions. On the contrary, some of the diverse effects which existed under pre-project conditions, such as water- logging and uncontrolled cuts in embankments for the constellation of sub-standard inlet structures, have been minimised or eliminated by the project interventions. No mangrove forest has been destroyed as a result of the project.

An independent evaluation by Rahman et al (1995) of the same project, however, expressed a different view. They made the following point: the traditional shrimp culture even though did not affect environment in Coxs Bazaar, there have been a number of negative environmental consequences of it in Khulna region especially in non-project areas. However, a part of the project area in Khulna (e.g. Hanirabad and Munkia in polder 20) was also affected, mainly because of the presence of an outsider leaseholder who, due to unplanned culture, created some problems, such as harvest was prolonged and it affected transplantation of Aman crops. The planned activities of the project were also obstructed by him, for which the environmental condition of the area further deteriorated. The project could do nothing as he managed to take long-term lease from the beginning of the project. Later, the project appraisal document of the WB (1999) for the Fourth Fisheries Project admitted that the expansion of shrimp farming has raised important issues regarding land and water use in the coastal areas[T]he contrasting demands of rice farmers and those involved in shrimp farming have generated frequent conflicts in which poorer social groups in shrimp farming areas have often been the losers. ..[U]nplanned shrimp farming development has led to degradation of agricultural land and negatively affected the livelihoods of local people. The project appraisal document also admitted of the outbreak of fish diseases: outbreak of diseases, particularly White Spot may continue to threaten the shrimp culture. The adverse impact of biodiversity brought about by collection of wild shrimp fry has also been recognised: The sustainability of shrimp farming is also threatened by its reliance on the collection of wild shrimp fry. The activity now sustains a large number of households using cheap methods that supply key seed inputs to shrimp farmers but may, in the process, be gravely damaging wild stocks of both shrimp and other aquatic species.

29

Both farm and aggregate levels cost benefit analyses reveal positive net return from

shrimp farming, after taking environmental costs into considerations. Hence there is a

scope of taxing gher owners so that direct and indirect losers from the environmental

degradation can be compensated while maintaining the incentives for investing in

shrimp farming.

Bhattacharya et al (1999) opined that though economic gains outweighed the

environmental costs, conclusions had to be made carefully because environmental

costs were far-reaching, and the impact might be observed later over a long period of

time. Moreover, some of the environmental impacts are irreversible such as

biodiversity loss. The value of this is far greater than any quantifiable amount since

these are essential for human existence.

30

III Financial Sector Reform Financial sector reform was undertaken as a part of the SAP. With regard to the

financial sector reform the focus in this exercise will be on effects of these reform

measures on the stakeholders (especially rural sector and SME borrowers) of the

financial sector who are involved in the agriculture sector.

Till mid 1980s, all the financial institutions in Bangladesh were kept under the

ownership as well as regulatory control of the government. The ratio of urban-rural

branches, mobilisation of deposits and allocation of credit improved significantly in

favor of rural areas with the objective of the government to extend baking services to

the rural areas. Lending rates especially for priority sectors were kept at a lower level,

which in many cases did not cover even the actual cost of fund. A huge proportion of

the asset profiles of the financial institutions became overdue during the period. In

such circumstances, in 1986 National Commission on Money, Banking and Credit

was appointed by the GoB to identify ways and means for banking sectors recovery.

The commission completed the study and submitted recommendations to the GoB,

most important of which were related to overall structure of the banking system;

various administrative and judicial steps required for overcoming problems of

overdue loans; and rural and agricultural credit strategy for maintaining adequate

credit flow to rural sector. However, very little progress was made in terms of

implementation.

III.1 The setting

For the development of financial sector of Bangladesh, a wide ranging reform

measures were undertaken on the basis of the recommendations of a World Bank

Consultative Mission which provided the basis for a Financial Sector Adjustment

Credit (FSAC) just at the start of 1990s. The FSAC initiators attempted to address

deficienc ies of banking sector identifying four groups of causes namely economic,

prudential, institutional and legal. The designers found that preferential lending was

one of the major causes of financial distress. The NCBs were obliged to extend

preferential credit to these sectors, which in turn was often refinanced by the

Bangladesh Bank. Another group of root causes of Bangladeshs banking

deficiencies was "managerial and institutional weakness" In this backdrop, financial

31

sector reform measures were launched under FSAC to support GOBs medium term

financial sector reform program in early 1990s. FSAC was approved by the IDA in

mid 1990 and became effective. In the process, USAID financed the complementary

US$ 16.3 million for FSRP TA (Financial Sector Reform Project Technical

Assistance). After the expiry of FSRP in 1996, the GoB formed the Banking Reform

Committee (BRC) to evaluate the situations arising in the banking sector and place

recommendations to GOB9. Though the Financial Sector Reform Programme (FSRP)

ended in mid-1990s, yet the reform measures were continued to be pursued. While the

then government partially acted on some of the recommendations of the BRC, a large

part of them remain unaddressed.

III.2 Broad Policy Framework

The financial sector reform in Bangladesh under FSAC called for measures to

liberalize interest rates, improve monetary policy, abolish priority sector lending,

strengthen central bank supervision and regulation of banks, improve the environment

of debt recovery and broaden capital market development. The fundamental objective

of the reform program was to improve the functioning of the country's banking

system, and increase its effectiveness in supporting the development efforts of GOB.

The FSRP was designed focusing on the areas of interest rate, banking supervision,

loan classification and provisioning, recovery of loans, and credit information. The

broad policy objectives as set for the financial sector reforms were: gradual removal

of the distortions in the interest rate structure with a view to improving the allocation

of resources; providing increased market oriented incentives for priority sector

lending; making subsides in these sectors more transparent; applying appropriate

monetary tools to control inflation; establishment of appropriate accounting policies

including recapitalisation, regulation and supervision, improvement of debt recovery

environment and strengthening the capital markets.

The main objectives of the FSRP TA were to: assist with monetary policy reforms at

BB; help strengthen bank supervision capabilities of BB; help improve the efficiency

and financial viability of the NCBs, some of which may be suitable for privatization;

9 It may also be mentioned here that in May 1997, a Commercial Bank Restructuring Project - CBRP funded by the World Bank was also undertaken.

32

expand private commercial banks (PCBs) share in total commercial banking; and

help improve the quality of training for the NCBs.

III.3 Impact of Financial Sector Reform

III.3.1 Removal of Directed Credit and Interest Rate Control

As part of monetary policy reforms and improvement of debt recovery environment the

past practices of priority sector directed lending was discontinued and refinance for

priority sector lending was replaced by single window rediscounting facility by the BB

for the commercial banks. The policy measures under interest rate decontrol can be

grouped into three categories (Bhattacharya and Titumir: 1998): move towards more

market-determined level and structure of interest rates; allow banks to charge different

lending rates based on borrower credit risk; and phase-out interest rate subsidies. In

1992 the interest rate bands were removed from all but three of the lending sectors and

banks were allowed to fix lending interest rate on their own judgement. From 1994 the

SME sector was subsidized by 3% for term loan. This subsidy also has been removed

from July 1999 (Bangladesh Bank: 1999). The only restriction in place till mid-1999

was interest rate bands in three priority sectors, namely agriculture, export and small

industries. From August 1999, the interest bands from the agriculture and SME sectors

were removed and since then the export sector alone enjoys the interest rate control.

The logic behind the imposition of credit control and interest rate subsidies after the

independence was to correct the imperfection in the credit market, which led to

economically and socially inefficient credit allocation. The credit ceilings and

prohibitions policies were directed toward controlling the flow of total credit. They

included ceilings on total lending by individual banks, lending to public and private

sectors, lending to different loan size classes, and lending for certain economic

purposes. Specialized banks were also served as allocational instruments. Ceilings on

lending interest rates were directed primarily towards the welfare and subsidy

objectives. All these various forms of directed and controlled lending were dismantled

through undertaking reform measures.

33

Table 7: Sectoral Distribution of Advances by Scheduled Banks (% of Total)

Sectors 1987 1990 1995 1996 1998 2000 2002 2004 2006 Agriculture, Fishing & Forestry

26.84 22.70 17.83 16.46 13.77

14.23

11.77

10.62

8.54

Industry 27.62 26.52 28.12 26.81 27.52 26.49

20.79

19.78

19.52

Construction 3.22 3.89 5.40 5.35 5.36

5.66

6.59

6.89

6.88

Trade

33.70

46.25

29.59

28.93

28.41

30.66

32.31

32.13

33.19

Source: Bangladesh Bank. Scheduled Bank Statistics, Various Issues

The sectoral distribution of lending by the scheduled banks of the country, as given in

the Table 7, shows drastic reduction in credit flow to the agriculture sector, largest

contributor to GDP. Therefore, on the whole, the sectoral distribution of bank

advances after the reform as compared to pre-reform period does not show better

allocation of resources in favour of productive/priority sectors.

Table 8: Credit Allocation Index: Ratio of Advance Proportions to GDP Proportions

Sector 1996 1998 2000 2002 2004 2006 Agriculture 0.633 0.552 0.569 0.506 0.482 0.390 Industry 1.74 1.78 1.70 1.30 1.20 1.12 Construction 0.752 0.698 0.700 0.7.63 0.763 0.751 Trade 2.23 2.15 2.27 2.32 2.75 2.34

Note: Calculated based on Bangladesh Bank data.

Loan-output ratio, as an indicator of efficient credit allocation (Table 8) also

substantiates the argument of improper allocation of resources after interest rate and

directed credit deregulation. The ratio, in case of agriculture, fell down from 0.633 to

0.390 during 1996 2006. During the period, the contribution of agriculture sector to

GDP also decreased but decline of agricultural advances by banks was much more

rapid. As a result loan-output ratio of agriculture decreased. The ratios also indicate

that the rates of bank advances for other major sectors are much higher relative to

their contribut ions to the GDP. With the reduction of directed credit, bankers are

being given larger control over their assets and the net result is a combination of high

34

interest rates and less advances for productive sectors by banks despite the reforms

made more liquidity available in the monetary system.

III.3.2 Rural Banking and Restructuring of Rural Branches of NCBs

In the later part of the 1970s and in the first part of the 1980s both Bangladesh Krishi

Bank (BKB) and NCBs expanded very rapidly to increase the flow of credit to the

rural areas. The share of rural branches in total branches increased from 47 percent in

1973-74 to 67 percent in 1984 and since then the proportion declined gradually; in

March 2007, the proportion of rural branches stood at slightly higher than 58% (Table

9). This dramatic increase in the share of rural branches was made possible by

compelling the banks to open more and more rural branches to implement a

government sponsored agricultural credit program initiated in 1977 (Adams and

Nelson: 1981). As the denationalization and privatization process started in 1982-83,

and later reinforced by financial sector reform process in 1989-90, the proportion of

rural branches did not increase rather declined. Before 1982-83, nationalized banks

were required to establish two rural branches in order to open a branch in urban area.

But this directive was discontinued after starting of denationalization process in 1982-

83. At the moment Bangladesh Bank has a regulation for the newly established PCBs

to open a new rural branch among each new five branches. In 1982-83, BKB was also

asked to 'take over" more than one hundred loss incurring rural branches of Uttara and

Pubali Bank, just before denationalizing them. This policy was certainly against the

development of a viable rural banking structure. The on going corporatisation of

nationalised commercial banks, as suggested by the World Bank and IMF, may

further affect the rural banking structure. The process is also not moving smoothly.

Since early November 2007, the trading of Rupali Bank shares in the stock exchange

has been halted to check its unusual price fluctuation, as the winner of Rupali Bank

stakes is dilly-dallying for years in finalising the sale and purchase agreement. If the

situation continues many investors might be victimised.

35

Table 9 : Proportionate Share (in percent) of Rural Banking in Bangladesh Year Branches Deposit (%) Credit (%)

Urban (%) Rural (%) Urban Rural Urban Rural 1980 35.97 64.03 84.01 15.99 88.12 11.88 1985 32.73 67.27 81.68 18.32 73.83 26.17 1990 34.02 65.98 78.83 21.17 76.59 23.41 1995 38.31 61.69 77.9 22.1 80.22 19.78 1996 38.74 61.26 77.12 22.88 80.93 19.07 1998 39.34 60.66 77.22 22.78 82.89 17.11 2000 39.95 60.05 77.38 22.62 83.13 16.87 2002 40.20 59.80 80.92 19.08 86.08 13.02 2004 40.63 59.37 84.20 15.80 89.13 10.87

2006 [Dec] 41.25

58.75 86.39 13.61 90.61 9.39

Source: Bangladesh Bank. Scheduled Bank Statistics, Various issues

It also appears from Table 9 that the share of rural deposit increased gradually upto

2000 and then started falling. The share of rural credit have been decreasing

continuously throughout the 1980s, 1990s and in recent years. It can be seen that the

proportionate share of rural deposit was higher than that of credit through out the

period, except some years. This also indicates that a certain portion of deposit, which

is mobilized from rural areas, is transferred to urban areas. The flows of agricultural

credit before- and after-SAP have been shown in Table 10. In many years in 1990s,

the net flow of agriculture credit (disbursement minus recovery) was negative.

Therefore, it shows that not only share of agriculture in total credit reduced, even

whatever inflow of credit was made by way of disbursement that was also siphoned

off in the name of recovery from agriculture sector.

Table 10 : Flow of Agricultural Credit by All Banks(Tk in million) Year Disbursement Recovery Outstanding

1981-82 4238.4 3143.4 13515.1 1985-86 6317.2 6071.5 3004.28 1990-91 5956.0 6253.2 57034.5 1997-98 18145.0 17792 85150.4 2000-01 30196.7 28778.7 111372.6 2002-03 32783.7 35163.