Report No. 7105-BD

BangladeshAdjustment in the Eightiesand Short-Term Prospects(In Two Volumes) Volume l: Executive Summary and Main ReportMarch 10, 1988

Asia Country Department I

FOR OFFICIAL USE ONLY

l

Document of the World Bank

This report has a restricted distribution and may be used by recipientsonly in the performance of their official duties. Its contents may not otherwisebe disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

The external value of the Bangladesh Taka (Tk) is fixed in relation to abasket of reference currencies, with the US Dollar serving as interventioncurrency. The official exchange rate on March 1, 1988 was Tk 31.50 perUS Dollar. Unless noted otherwise, the average rates for FY88 shown belowhave been used throughout this report:

US$ 1 = Tk 31.25Tk 1 = US$0.0320Tk 1 million = US$32,000

In this report US$ is sometimes abbreviated to $.

WEIGHTS AND MEASURES

1 acre (ac) = 0.405 hectare (ha)1 maund (md) = 82.27 pounds (lbs) = 37.3261 kg1 seer (sr) = 2.056 pounds (Ibs) = 0.933 kg1 cubic foot per second (cusec) = 0.0283 cubic meter per second1 mmcf = 1 million standard cubic feet1 crore = 10 million

FISCAL YEAR (FY)

July 1 - June 30

FOR OmCAL USE ONLY

List of Abbreviations and Acronyms Used

ADP - Annual Development Program

SADC - Bangladesh Agricultural Development CorporationBB - Bangladesh BankBBS - Bangladesh Bureau of StatisticsBCIC - Bangladesh Chemical Industries CorporationBHB - Bangladesh Handloom BoardBJMC - Bangladesh Jute Mills CorporationBKB - Bangladesh Krishi BankBMSS - Bittaheen Mohila Samabay SamityBPDB - Bangladesh Power Development BoardBOGMC - Bangladesh Oil and Gas Minerals CorporationBPC - Bangladesh Petroleum CorporationBRAC - Bangladesh Rural Advancement CommitteeBRDB - Bangladesh Rural Development BoardBSB - Bangladesh Shilpa BankBSEC - Bangladesh Steel and Engineering CorporationBSFIC - Bangladesh Sugar and Food Industries CorporationbSRS - Bangladesh Shilpa Rin SangsthaBSS - Bittaheen Samabay SamityBTMC - Bangladesh Textile Mills CorporationBWDB - Bangladesh Water Development ',oard

CD - Cana. DiggingCDST - Customs Duties and Sales TaxesCIDA - Canadian International Development Agency

DEDO - Duty Drawback and Exemption OfficeDFC - Drainage and Flood ControlDFI - Development Finance InstitutionDTW - Deep Tubewell

EMU - Energy Monitoring UnitEP - Essential PrioritiesEPZ - Export Processing ZoneERD - External Resources Division

FFW - Food For WorkFM - Flour MillsFPMU -

GOB - Government of BangladeshGR - Gratuitous Relief

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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HES - Household Expenditure SurveyHSN - Harmonized System of NomenclatureHTW - Hand TubewellHYV - High Yielding Variety

ICAB - Institute of Chartered Accountants of BangladeshICB - International Competitive BiddingICMAB - Institute of Chartered and Management Accountants of

BangladeshIMED - Implementation, Monitoring and Evaluation DivisionINFS - Institute of Nutrition and Food Sciences

KSS - Krishak Samabay Samity

LCG - Local Consultative GroupLDT - Land Development TaxLE - Large EmployersLLP - Low Lift Pump

MCH - Maternal-Child Health CareMEMR - Ministry of Energy and Mineral ResourcesMR - Modified RationingMS - Market SalesMSS - Mohila Samabay SamityMTFPP - Medium-Term Foodgrain Production Plan

NBR - National Board of RevenueNCB - Nationalized Commercial BankNCMBC - National Commission on Money, Banking and CreditNGO - Non-Government OrganizationNIP - New Industrial Policy

O&M - Operation and MaintenanceOMS - Open Market SalesOP - Other Priorities

PDP - Primary Distribution PointsPE - Public EnterprisesPFDS - Public Food Distribution SystemPFP - Policy Framework PaperPP - Project ProformaPPP - Preliminary Project ProformaProshika - Rural Development Centre

QR - QuantitaEive Restriction

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RES - Rural Electrification BoardRIP - Revised Industrial PolicyROR - Record of RightsRPA - Reimbursable Project AidRPP - Rural Poor Program

SAFE - Special Accounts in Foreign ExchangeSFYP - Second Five Year Plan (PYSI-FYSS)SPEC -SR - Statutory RationingSTW - Shallow TubewellSwarnivar - Self-reliance Movement

TA - Technical AssistanceTACC - Technical Assistance Coordination CellTDP - Transport Distribution PointsTFYP - Third Five Year Plan (FY86-90)

UCCA -UCI - Universal Imunisation ProgramUNDP - United Nations Development ProgramUNICEF United Nations International Children's Emergency FundUSAID - United States Agency for International Development

VAT - Value-Added TaxVGD - Vulnerable Group DevelopmentVGF - Vulnerable Group Feeding

WES - Wage Earners' SchemeWFP - World Food ProgramWHO - World Hcalth Organization

XPBS - Export Performance Benefits Scheme

ACKNOWLEDGEMENTS

The preparatior of this report was greatly assisted by the activecooperation of the Government of Bangledesh. The authors wish to thankthe officials in the Ministries of Planning, Finance, and Food, PlanningCommission, Bangladesh Bank, Bangladesh Bureau of Statistics and manyother departments and agencies for generously sharing their time, viewsand data. A dra:t of the report was discussed with the Government inFebruary 1988.

The report was prepared by a team led by Para Suriyaarachchi andconsisting of Alberto Agbonyitor, David Hughart, John MacGregor,Syed Nizamuddin, Helena Ribe, Vidya Shetty, Richard Westin, andFahrettin Yagci. Major inputs were also provided by Janet Koch andPradeep Mitra. Linda Reese and Sultan Ahmed Khan provided administrativeand secretarial support.

TITLE: ADJUSTMENT IN THE EIGHTIES AND SHORT-TERM PROSPECTS

COUNTRY: BANGLADESH

REGION: ASIA COUNTRY DEPARTMENT I

SECTOR: COUNTRY ECONOMIC

REPORT TYPE CLASSIF MM/YY LANGUAGES7105-BD CFEM Restricted 03 88 English

PUBDATE: 8803

ABSTRACT: This report reviews Bangladesh's stabilization and adjustmentefforts and macroeconomic performance in the 1980s, and growthprospects for FY88 in the aftermath of the recent floods andpolitical unrest. It also discusses economic policy options inthe near term and selected aspects of policies to sustain economicgrowth in the medium term, in particular improving domesticresource mobilization and the management of public expenditures.Accordingly, Chapter I provides an overview of the Government'slargely successful efforts since the early 1980s to reduceexternal and fiscal deficits to more manageable levels andmaintain a reasonable level of economic growth, while making someheadway in poverty alleviation. It also discusses the effects ofthe recent floods and political unrest on the economy, economicprospects for the current fiscal year and external assistanceneeds for FY89. Chapter II reviews the evolution of policies inagriculture, industry and trade, energy and human development overthe past few years and indicates where further improvements inpolicies are needed in these areas. Chapter III focuses oneconomic management in the near term and suggests the need forrevitalizing the economy through selective increases in publicexpenditures when political stability is restored. It alsodiscusses the reforms needed in the tax sysFem, the financialsector and the management of public expenditures to sustaineconomic growth in the medium term.

BANGLADESH

ADJUSTMENT IN THE EIGHTIES AND SHORT-TERM PROSPECTS

TABLE OF CONTENTS

Page No.

COUNTRY DATA

EXECUTIVE SUMMARY i

INTRODUCTION 1

Chapter I : RECENT ECONOMIC PERFORMANCE AND SHORT-TERM PROSPECTS

A. THE ECONOMIC SETTING - BACKGROUND TO RECENTDEVELOPMENTS 1

Introduction ............................ 1Progress Towards Adjustment .......................... 1Macroeconomic Balances and Savings andInvestment Trends ........... ...................... S. * *e *. * 3

The Incentive Framework .............................. 5Poverty Alleviation ......... .................. .. ... . 6

B. PRODUCTION TRENDS AND SHORT-TERM ECONOMIC MANAGEMENT 10Growth and Composition of Production ................. 10Food Availability ............................... 14Budgetary Developments ............................... 16Balance of Payments .o... . . o oo o... .. ... . .o. . 18

C. SHORT-TERM ECONOMIC OUTLOOK 24Recent Developments . .. . .. . .. . .. . .. .o........o o o.. ... . . . . . 24The Impact of the Floods ............................. 24Post-Flood Recovery and Rehabilitation Program ....... 25Foodgrain Management .. . . . . . .o.o.o.o. .. . . ... . . . .. ... . ..o.. 27Economic Growth Prospects for FY88 ................... 29Budgetary Prospects ................................. . 30Prospects for Balance of Payments .................... 31Foreign Aid Trends . .................. 33Aid Requirements for FY89 ............................ 36

Chapter II : THE EVOLUTION OF POLICIES IN KEY SECTORS

A. AGRICULTURE AND FOOD POLICY 39! ~~~~~Agriculture 39

Food Policy 46B. INDUSTRY AND TRADE 54

Reforms in the Industrial Sector ..... ............... 54Trade and Exchange Rate Policies ................... 00 58

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C. ENERGY 61Adjustment During the Eighties ....................... 61The Present Situation and Future Outlook For Energy .. 63Traditional Energy ....... ********* ................... 66

D. POLICIES AND PROGRAMS FOR POVERTY ALLEVIATIONAND HUMAN RESOURCE DEVELOPMENT 66

The Government's Programs *o..oooooo .........*...o....o 67Non-Government Organization (NCO) Programs ........ .... 72Required Improvements ..... .. ... ..... .. .. .. ..... .. 73

Chapter III: ECONOMIC MANAGEMENT AND RESOURCE MOBILIZATION AND USE

A. ECONOMIC MANAGEMENT IN THE NEAR TERM 75Introduction ........ #o..ooo..o ...... memo .................... 75

B. THE POTENTIAL FOR TAX REFORM 8

The Current Tax Structure ................. o.ooooooo 84Features of Indirect Taxation .... o................ 87Features of Direct Taxation ............... ..".....0 87Reform of Indirect Taxation ........................... 88Reform of Direct Taxation .....................o..oooo 89Tax Administration ..................... ... 90Agricultural Taxation .. .. ..... o......o ..... ... . 90

C. REFORMING THE FINANCIAL SECTOR 91Introduction ........ ............. ........................... 91Macro-Financial Policy ..o..... ... ......... ...... .....o.o. .. 92Institutional Reforms .... ....... .. oo............. 94

D. THE MANAGEMENT OF PUBLIC EXPENDITURES 96Project Implementation .... ..... ........... ........... ..... 97Expenditure Planning, Budgeting and Control .. .... m.... 101Public Administration Reform .......... oo.............. 105

MAP

List of Text Tab'es

Chapter I

1.1 Key Macroeconomic Indicators, FY81-FY87 ..... ............. 21.2 Macroeconomic Balances, FY81-FY87 ..... ................... 41.3 Key In-ceative Indicators, FY81-87 ....................... 51.4 Trends in Real Daily Wages for Unskilled Labor,

FY80-FY87 .................... 81.5 GDP Growth By Sectors, FY73-FY87 ................. ........ 111.6 Trends in Agricultural Production and Value Added,

FY81-FY87 ....... * . *. .. .. . . ............. . . ... ..... ...s.o... 121.7 Value Added in Manufacturing, FY87 ........ 0.......*........ 141.8 Summary of the Foodgrain Situation, FY81-FY88 ..... ,...... 151.9 Income and Expenditure of the Central Government

FY81-FY88 .....*.......... ......................... o........ 171.10 Balance of Payments, FY81-FY88 .. o .......... ..... see. 191.11 Trends in Imports, FY81-FY88 ..... s... .. 0 ............... 211.12 Pattern of Exports, FY81-FY88 .. o ...... sees...... 231.13 External Aid - Trends in Commitments and Disbursements,

FY81-FY88 ....................................... so.... 341.14 Commitments of Commodity Aid By Type of Donor,

FY81-FY86 ........................................... 36

Chapter II

2.1 Selected Indicators for Inputs and Production;-n Agriculture ............ -.................. ...... 41

2.2 Production Incentives, FY81-FY87 ......................... 462.3 Structure of Demand and Supply of Foodgrains ... .......... 482.4 Distribution Channels of Public Food Distribution

System, FY87 *..................................... oooo.eo 502.5 Rate of Subsidy in PFDS .q*..*....* .... .... ** 512.6 Reductions in the Negative List, FY86-FY88 ............... 59

Chapter III

3.1 Key Economic Projections, FY88-FY92 773.2 Economic Classification of Tax Revenue, FY87 853.3 Tax Elasticities (E) and Bouyancies (B), FY73-FY85 ....... 86

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COINTT DA_A - D

__n POU (1965) D T (IWS)

143,999 k&2 100.4 m li.99 e of tetal reRate of Growth$ 2.4 1.042 POT kK2 of cultivaUl load

rUrATIN-OW C ACMC I C (19") UT0L0Crued ILtb Rate (pOr '000) *9.0 Population per physicia S.900Crude D"th late (per '000) 13.0 Ppulation pcr opital bods 3.600latent ortality (par '000 live births) 125.0

INCOME D RIJUTZWN (1902) DISTEIXUl CW LAD _ lWAI (1978)a of ationa inome. highest quistileg 42 2 owXed by top 101 of Owner 49

i of national inca, lowest quistile: 12 X Owned by amaleat t01 Of owner:t 2

ACCESS To PIFU WATER (1900) ACCSS TO UCIUICIT (1960)2 of population - urbans 26 S of population - urbaun 3.5X of population - rural: 40 X of population - rural:

1ufl3ITZ (1983) UUCATZOlCalorio intke " 2 of requir_asnatc 84 dult literacy rate () (tl960181) 29Per capita protein intake (grms), 42 Priary *chool enroll-ent (2) (1985) 60

Wr pE WAPITA IN 1986t US$160 La

GROSS D2!iUTIC PRtUCT (1986/87) AUAL RATS Of GitR0 (L con*tant Pric")

miU. US 2 iS-O 181-6S nFe6-87

GDP at i(rket Prices 17.597 100 7.5 3.1 4.5Groos Dometi Inve"tmnt 2,16? 12 0.1 3.3 1.6Gross National Saving 1.221 7Current Account allmnce -966 -5hports of Goodso fob 1074 6 4.7 2.5 16.VTugprte of Goods. cif 2.620 -15 6.2 1.1 -2.0

QiTpUT. LIOR TORCIE ANDPRC TIYVITT IN 1986/87

Value Added b Labor Porce Ic V. A. Per Worker Ldmill. uBs mill 2k U!# I

Agriculture 8.324 47.3 16.8 59 495 soIndustry 2.369 13.5 3.1 11 764 124s8rvices 6904 39_.2 8.6 30 803 130

Total/Averase 17.597 100.0 26.5 100 617 too

CfuSRA GOVmNT PIWCE /a(bl U , fr=mcz (billS2 of GP

7110"___ 112 NS

Current Revenues 48.35 6.8 9.0Current kxpenditures 39.01 4.7 7.2Current Surplus -T3U -1.8 -ii7Capital Rxpenditure. 52.76 12.7 9.8xtnetnal Asdistance (net) 39.98 7.6 7.4

La World Benk Atlas nethodoloSy. base 1983-85.Ab m a rket prices.CivilXgn labor force: 1963/84 data. Sectoral distribution dtte ehom are extrapolatet froevailable dote on distribution of enployed per4ona

/4 1983/84 data.Z Provisional.

t Not available.... - Not applicable.

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U1? DATA - 3ADWADS8N

nIIIT. CRDIT 4M PMUCU Jume 1900 Junm 1961 Ju I94; June 1983 Juae 1954 June 1945 Jun to" if" Ilillion T ki outetendita,. end of period)

Nowe and Quai HIkmy 34.3 41.3 45.5 59.0 U3.9 105.3 123.4 136.5Bank Credit to Public Sector 25.4 36.9 43.9 44.4 50.0 55.7 65.1 64.0Bank Credit to Private Sector 14.3 17.8 23.6 31.0 49.1 68.9 83.e 89.8

(Percentagee or Index Numbers)

Honey nd Quai Nom anS of GDc 17.3 17.8 17.2 20.5 24.0 25.3 26.7 25.7General Price Indez (1973/74x100)/a 22686 255.0 296.5 325.9 357.5 396.6 436.0 481.2AnnuaL percetage c%ange in:

CGnral Price Indes /a 16.5 12.5 16.3 9.9 9.7 10.9 9.9 10.4Bank credit to Public Sector 39.6 45.3 19.0 -1.1 12.6 11.4 16.9 -1.7Bank credit to Private Sector 30.0 23.1 34.0 31.3 58.4 40.3 21.3 7.2

DALANCI OF PA41SS NwUOC1DI83 uOatTS (I986/87)(mill. Us$)

1976/77 1986/87 mill. USS $

Ixporte of Goods. fob 411 1.074 Raw jute 104 10Imports of Goode. c6f -865 2.620 Jute goods 301 28Traee Cap (deficit - -) -454 -1.546 Sea 30 3Non-fector services. not 2 -30 Leather 135 13Workers' Reittances el 731 Irih & shrimps 136 13Other factor Payments (net) -31 -121 Gcrments 299 ZsCurrent Account Dalance -402 -966 Others 69 6Direct Foreign Investment . .. Total 1.074 100Net ILT Borrowing 247 784

(Diebursements) (277) (938)(Amortization) (-30) (-154) _TSIAL DIT. December 30, 1986

Capital Grants 256 657IMF facilitiee. net -2 134 eill. US8Other Capital. net 18 -352

Change in Reserves (- = increrse) -8l -257 Public Debt. incl. Guaranteed Private Debt 7,281.7Non-Guaranteed Private Debt

Gross Reservee (end of year) 294 752Total Outstanding & Disbursed 7,281.7

RATS Or ICH'ANG (March 1. 1988) DEBT SLRVICI RATIO FOR 1986/87

US$1.00 Take 31.50

Public Debt. inl. Guaranteed Private Debt 19.1Non-Guaranteed Private DebtTotal 19.

IBRD/IDA LONDING, December 1986 (million U$)

IBRD IDA

Outtaanding 6 Disbursed 51.9 2.449.6Undisbureed - 1,361.2Outetendi.g. incl. Undisbursed 51.9 3.810.8

= not evailable.

March 1988