Bangladesh - iuj.ac.jpBangladesh at a glance: 2004-05 OVERVIEW Bangladesh is likely to remain politically unstable throughout the forecast period, as the main opposition Awami League

Country Report January 2004

Bangladesh

January 2004

The Economist Intelligence Unit15 Regent St, London SW1Y 4LRUnited Kingdom

Bangladesh at a glance: 2004-05

OVERVIEWBangladesh is likely to remain politically unstable throughout the forecastperiod, as the main opposition Awami League (AL) continues to demand thatthe coalition government, led by the Bangladesh Nationalist Party (BNP), stepdown. Such demands will be backed up by strikes and demonstrations, andthe AL is also likely to continue to boycott parliament. Despite problems ofpolitical instability and violent crime, the government is expected to continueits reform of the state-owned sector. GDP growth will rise to 5.7% in fiscal year2003/04 (July-June) and 5.8% in 2004/05, in line with stronger demand fromthe global economy and faster agricultural growth. Imports will rise faster thanexports, but this will be offset by strong inflows of remittances and foreign aid.A decision to allow gas exports, which would boost foreign direct investment,is looking less likely as this would exacerbate internal political tensions.

Key changes from last month

Political outlook• Despite the AL's announcement that the government will be toppled by a

mass movement if the opposition's 15 demands are not met byFebruary 10th, the BNP is likely to remain in power until the 2006 generalelection falls due.

Economic policy outlook• The decision in December 2003 to allow government ministries, rather than

the Privatisation Commission, to handle the liquidation of state-ownedenterprises (SOEs) confirms the Economist Intelligence Unit's expectationthat the government will proceed with the reform of around 75 SOEs overthe forecast period.

Economic forecast• Trade data showing a 13.2% year-on-year increase in exports in July-

November 2003 and a 26.5% year-on-year increase in imports adds weight toour forecast that the current account will fall back into deficit in 2004-05.However, inflows of remittances from Bangladeshi workers overseas willcontinue at a fairly strong pace, and so the current-account deficit willremain small as a proportion of GDP

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Bangladesh 1

Country Report January 2004 www.eiu.com © The Economist Intelligence Unit Limited 2004

Contents

3 Summary

4 Political structure

5 Economic structure5 Annual indicators6 Quarterly indicators

7 Outlook for 2004-057 Political outlook8 Economic policy outlook9 Economic forecast

12 The political scene

17 Economic policy

19 The domestic economy19 Economic trends21 Infrastructure23 Financial and other services

25 Foreign trade and payments

List of tables9 International assumptions summary11 Forecast summary19 Money supply20 Consumer price inflation23 Stockmarket indicators, 200327 International reserves27 Remittances from non-resident Bangladeshis

List of figures11 Gross domestic product11 Consumer price inflation20 Domestic credit26 Workers' remittances

.

Bangladesh 3


Summary January 2004

Bangladesh is likely to remain unstable politically over the forecast period, asneither of the main political parties is prepared to accept the legitimacy of theother's rule. The ruling Bangladesh Nationalist Party (BNP) does not, however,face an election until 2006, and so gradual progress on the reform programmeis expected. GDP is likely to grow by 5.7% in 2003/04, up from 4.4% in 2002/03,with a further uptick to 5.8% in 2004/05. However, strong import growth willpush the current account back into a small deficit.

The main opposition party, the Awami League (AL), has continued its boycottof parliament, the new session of which began on January 18th. The AL iscalling for an early general election, and has given the BNP a list of 15 demandsto meet by February 10th, after which date the AL claims that the BNP will beforced to resign by a mass movement. The law-and-order situation deterioratedfurther in 2003, according to a number of reports. Political killings affectedmembers of both major political parties, and women and children bore thebrunt of human rights abuses. The government has recently bannedpublications by the Ahmadiyya religious minority. The early January meetingof the South Asian Association for Regional Co-operation has produced anagreement to set up a South Asian Free Trade Area from 2006.

A new trade policy unveiled in October calls for limited safeguard measures fora range of industries on health and safety, as well as religious and othergrounds. Margin requirements on letters of credit have been lifted or reduced,prompting the IMF to release a further US$74m under a poverty reduction andgrowth facility scheme. The US is pressing Bangladesh to allow trade unions inexport-processing zones. Privatisation rules have been modified.

Domestic credit to the private sector is rising strongly, and inflation has begunto climb. The World Bank is considering financing investment in the Bangladeshenergy sector. GMG Airlines has been given permission to fly some newinternational routes. Confidence in the capital market has been partly restored,as the number of initial public offerings (IPOs) floated on the Bangladeshstockmarkets rose strongly last year; the IPOs were heavily oversubscribed.There has been some improvement in the classified loan ratios of the bankingsector, and the banking sector has reported a good year for operating profits.

Bangladesh's exports have begun to rise fairly strongly, but imports are risingeven more strongly, partly reflecting stronger domestic demand. Bangladesh'sforeign-exchange reserves continue to rise rapidly, owing to stronger exportdemand and increased foreign aid inflows. Remittances from workers overseashave also increased further. The Asian Development Bank (ADB) will finance anumber of infrastructure projects.

Editors: David Webb (editor); Graham Richardson (consulting editor)Editorial closing date: January 11th 2004

All queries: Tel: (44.20) 7830 1007 E-mail: [email protected] report: Full schedule on www.eiu.com/schedule

Outlook for 2004-05

The political scene

Economic policy

The domestic economy

Foreign trade and payments

4 Bangladesh


Political structure

People's Republic of Bangladesh

Parliamentary democracy, following a constitutional amendment in September 1991

The prime minister is the chief executive and the head of the Council of Ministers (thecabinet), which she selects; the president has a largely ceremonial role, but he appointsmembers of the cabinet and the judiciary, and has the power to dissolve parliament

A unicameral parliament, consisting of 300 members directly elected from singleterritorial constituencies; the legislature is elected for a five-year term

October 1st 2001; the next election is due by late 2006

An alliance of the Bangladesh Nationalist Party (BNP) and three small parties won morethan two-thirds of parliamentary seats in the October 2001 election, which was overseenby a non-partisan caretaker government. The BNP dominates the alliance, with a largeparliamentary majority in its own right. The Jamaat-e-Islami (Jamaat), an Islamist party, isthe largest coalition partner; the Islami Oikyo Jote (IOJ) and the Manjur faction of theJatiya Party (JP) complete the government

Bangladesh Nationalist Party (BNP); Awami League (AL); various Jatiya Party (JP) factions;Jamaat-e-Islami (Jamaat); Jatiya Samajtantrik Dal (JSD); Islami Oikyo Jote (IOJ)

President Iajuddin AhmedPrime minister & minister of defence establishment & energy Khaleda Zia

Agriculture M K AnwarCommerce Ameer Khasru Mahmood ChowdhuryCommunications Nazmul HudaEducation Osman FaruqueEnvironment & forestry Shahjahan SirajFinance & planning Mohammad Saifur RahmanFood Abdullah Al NomanForeign affairs M Morshed KhanHealth & family welfare Khondoker Mosharraf HossainHome affairs Alhaj Altaf Hossain ChowdhuryIndustry Maulana Motiur Rahman NizamiLaw, justice & parliamentary affairs Moudud AhmedLocal government, rural development & co-operatives Abdul Mannan BhuiyanWater resources M Hafizuddin Ahmed

Fakhruddin Ahmed

National legislature

Form of government

Official name

National elections

National government

Main political organisations

Key ministers

The executive

Central bank governor

Bangladesh 5


Economic structure

Annual indicators1999 a 2000 a 2001a 2002 a 2003 b

GDP at market prices (Tk bn)c 2,197.0 2,370.9 2,535.5 2,714.1 3,004.8 a

GDP (US$ bn)c 45.7 47.1 47.0 47.3 51.9 a

Real GDP growth (%)c 4.9 5.9 5.3 4.4 5.3 a

Consumer price inflation (av; %) 6.2 2.4 1.9 3.4 5.4Population (m) 135.0 137.9 140.9 143.8 b 146.8

Exports of goods fob (US$ m) 5,458.3 6,399.2 6,084.7 6,078.4 6,909.4Imports of goods fob (US$ m) 7,535.5 8,052.9 8,133.4 7,714.0 9,594.7

Current-account balance (US$ m) -364.3 -305.7 -535.4 741.5 0.7Foreign-exchange reserves excl gold (US$ m) 1,603.6 1,486.0 1,275.0 1,683.2 2,600.0Total external debt (US$ bn) 16.6 15.7 15.2 16.5 b 18.1

Debt-service ratio, paid (%) 8.8 8.6 7.5 7.9 b 7.6Exchange rate (av) Tk:US$ 49.09 52.14 55.81 57.89 58.18

a Actual. b Economist Intelligence Unit estimates. c Fiscal years ending June 30th of the year indicated.

Main origins of real gross domestic product 2003ab % of total Components of nominal gross domestic product 2003a % of totalAgriculture 23.5 Private consumption 75.6Industry 27.2 Government consumption 5.0

Manufacturing 15.9 Gross fixed investment 23.2 Construction 8.6 Exports of goods & services 14.1

Services 49.4 Imports of goods & services -19.5

Principal exports 2003ac US$ m Principal imports 2003ac US$ mGarments 3,601 Capital goods 2,652Fish & prawns 321 Textiles & yarn 1,896

Jute goods 220 Petroleum & petroleum products 887Leather & hides 212 Cereals & dairy products 469Raw jute 69 Iron & steel 455

Main destinations of exports 2002 % of total Main origins of imports 2002 % of totalUS 27.6 India 14.7Germany 10.4 China 11.6UK 9.8 Singapore 11.6

France 5.7 Japan 7.6Italy 4.0 Hong Kong 5.4

a Fiscal years ending June 30th of the year indicated. b At constant 1995/96 prices. c Customs basis.

6 Bangladesh


Quarterly indicators2001 2002 20034 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr

OutputIndustrial production index (1995=100) 140.3 145.3 147.3 155.1 150.3 156.2 150.3 156.2Industrial production index (% change,

year on year) -1.1 14.7 21.7 14.1 7.1 7.5 2.0 0.7PricesConsumer prices (1995=100) 130.6 133.9 134.3 137.0 138.3 137.0 138.3 n/aConsumer prices (% change, year on year) 1.6 2.8 2.6 5.6 5.9 2.3 3.0 n/aConsumer prices (1985/86=100) 243.9 245.5 246.7 252.5 254.9 259.3 261.2 n/a Food, beverages & tobacco 245.7 244.0 244.5 252.0 254.4 258.6 260.9 n/aFinancial indicatorsExchange rate Tk:US$ (av) 57.00 57.85 57.90 57.90 57.90 57.90 57.90 58.33Exchange rate Tk:US$ (end-period) 57.00 57.90 57.90 57.90 57.90 57.90 57.90 58.42Deposit rate (av; %) 8.50 8.14 8.14 8.14 8.25 8.22 7.81 n/aDiscount rate (end-period; %) 6.00 6.00 6.00 6.00 6.00 6.00 6.00 6.00Lending rate (av; %) 16.00 16.00 16.00 16.00 16.00 16.00 16.00 n/aM1 (end-period; Tk bn) 242.44 234.33 241.61 235.40 254.72 246.76 267.43 257.41M1 (% change, year on year) 10.7 7.3 8.1 5.7 5.1 5.3 10.7 9.3M2 (end-period; Tk bn) 943.63 933.98 986.16 1,015.87 1,068.98 1,066.21 1,139.94 1,175.75M2 (% change, year on year) 14.7 13.2 13.1 14.9 13.3 14.2 15.6 15.7Foreign trade (Tk bn)Exports fob 56.44 65.55 62.71 77.57 58.47 70.02 72.59 n/aImports cif -110.66 -115.30 -116.22 -104.91 -121.12 -137.76 -152.85 n/aTrade balance -54.22 -49.75 -53.51 -27.35 -62.65 -67.74 -80.26 n/a

Balance of payments (US$ m)Merchandise trade balance fob-fob -483.4 -477.0 -467.4 -53.5 -637.6 -768.4 n/a n/aServices balance -128.8 -115.5 -91.5 -118.7 -258.8 -163.2 n/a n/aIncome balance -81.0 -79.1 -90.6 -61.8 -49.4 -32.2 n/a n/aNet transfer payments 659.3 850.6 763.0 818.3 810.6 947.7 n/a n/aCurrent-account balance -33.9 179.0 113.5 584.2 -135.2 -16.2 n/a n/aReserves excl gold (end-period) 1,275.0 1,299.3 1,547.3 1,691.1 1,683.2 1,736.0 2,431.3 2,455.1

Sources: IMF, International Financial Statistics; Bangladesh Bank.

Bangladesh 7


Outlook for 2004-05

Political outlook

The Bangladeshi political scene is likely to remain bitterly divided betweensupporters of the ruling Bangladesh Nationalist Party (BNP), led by the primeminister, Khaleda Zia, and the opposition Awami League (AL), led by SheikhHasina Wajed. Neither of the main parties seems prepared to accept thelegitimacy of the other's rule. The government has a large majority inparliament and does not face an election until 2006, but the AL has boycottedparliament since June 2003 and its call for an early general election is beingbacked up by a series of strikes and demonstrations. On January 10th 2004 theAL presented the BNP with a list of 15 demands, including the setting up of anindependent anti-corruption commission, the introduction of controls on theprices of essential goods and the reopening of closed-down state-ownedindustries, claiming that it would force the BNP from power through massmovement if the demands were not met by February 10th. Such initiatives areunexceptional in Bangladesh: the government will remain in power, but theopposition's ability to challenge the government on the streets will limit theruling party's room for manoeuvre on policy.

Violent crime, including political killings, bedevil relations between the mainparties. One example is the killing on December 15th 2003 of Talukder AbdulHalim, a BNP official in Mongla. Unrest is also increasing in the Chittagong HillTracts region, where tribespeople are demanding that government troopswithdraw and the government implement the peace accord signed with the ALgovernment in 1997. Extremist groups are believed to operate withinBangladesh, but any sustained crackdown on Islamist groups is likely toencounter stiff opposition from Jamaat-e-Islami and Islami Oikyo Jote, Islamistpolitical parties that form part of the BNP-led governing coalition. The influenceof these parties is seen in the recent decision to ban publications by theAhmadiyya religious minority.

Bangladesh's most important international relationship is that with its hugeneighbour, India. The two countries have a history of strained relations, andtensions persist on a number of fronts. The issue of migration between the twocountries remains highly sensitive: Bangladesh rejects India's claim that manyBangladeshis have illegally crossed over into north-eastern India. India also hasconcerns regarding the activities of separatist rebels, who it suspects operatefrom camps across the border in Bangladesh. A further issue centres onBangladeshi objections to Indian plans for a river-linking project that may affectthe flow of water into Bangladesh.

Bangladesh is anxious to see its large trade deficit with India addressed in free-trade agreement (FTA) discussions. India is also seeking an agreement onfreight transit rights through Bangladesh to the north-eastern Indian states.Although progress on an FTA with India is likely to be slow, the South Asiannations recently agreed to set up a South Asian Free Trade Area (SAFTA) by2006. As one of the less developed countries in the region, Bangladesh will

International relations

Domestic politics

8 Bangladesh


have until 2013 to reduce tariffs to 5% or below. All the participating countrieswill maintain a sensitive list of items not covered by the free-trade proposals.Bangladesh also hopes eventually to negotiate a bilateral FTA with the US,following preliminary talks held with US officials in Dhaka in early August.Early progress on this is unlikely.

Economic policy outlook

The government has made some headway on economic reform since coming topower in October 2001, but progress is slow. A major challenge is to diversifythe export base away from the garment industry, which currently accounts forover 70% of total exports from Bangladesh. This sector is coming undercompetitive pressure in major markets such as the US. Pressure is alsomounting around the contentious issue of the export of gas to India.Multilateral donors and potential foreign investors have highlighted thefinancial benefits to be gained from gas exports, but it is looking increasinglyunlikely that exports of gas will be permitted. The domestic debate has movedon to the discussion of local gas supply shortages. The government will investup to Tk250bn (US$4.2bn) in the gas sector by 2007 to improve supply. The ALand other opposition groups would take to the streets to protest any decision toallow gas exports.

The government expects a further strong rise in revenue collection in fiscal year2003/04 (July-June). However, large increases in non-development expenditureand Annual Development Programme expenditure are forecast. Consequently,the government expects a slight worsening in the budget deficit, which itforecasts at 4.8% of GDP in 2003/04. The forecasts contained in the budget areoptimistic, as they assume that the strong increase in revenue collection in2002/03 will be improved upon in 2003/04. However, economic growth is notexpected to pick up dramatically. Future increases in revenue will dependlargely on the government's ability to improve the efficiency of tax collectionand reduce tax evasion and corruption. These are mammoth tasks, owing tothe weakness of the bureaucracy and the pervasiveness of corruption.Expenditure growth will also be held back by the inability of public agencies toabsorb development funds budgeted to come from international donors. TheEconomist Intelligence Unit therefore forecasts a rise in the budget deficit as aproportion of GDP to 4.7% in 2003/04, following an estimated deficit of 4.3% ofGDP recorded in the previous fiscal year. In 2004/05 the deficit will rise to 5%of GDP as attempts to produce a further large increase in revenue collectionfalter and expenditure growth remains high.

We expect the government to maintain an expansionary monetary policy overthe forecast period. Figures published by Bank Bangladesh (BB, the centralbank) show only a 4.8% increase in domestic credit between end-2002 and end-October 2003, although growth in domestic credit to the private sector has beenmore healthy, at 9.5% over the same period. The government remainsconcerned about high commercial lending rates, which we expect to remainaround 15% throughout the forecast period. This is well above the bank rate (set

Policy trends

Monetary policy

Fiscal policy

Bangladesh 9


by BB), which stands at 5%. In an attempt by the government to encourage theprivate banks to lower their average lending rates, they are now permitted tohandle 25% of the government's development funds, compared with theprevious level of 15%.

Economic forecast

International assumptions summary(% unless otherwise indicated)

2002 2003 2004 2005Real GDP growthWorld 2.9 3.5 4.3 4.0US 2.2 3.2 4.2 3.1EU 1.0 0.6 1.9 2.2Exchange rates¥:US$ 125.3 115.9 104.5 106.5US$:€ 0.945 1.132 1.353 1.377SDR:US$ 0.772 0.714 0.648 0.644Financial indicators¥ 2-month private bill rate 0.10 0.03 0.03 0.10US$ 3-month commercial paper rate 1.70 1.10 1.18 3.13Commodity pricesOil (Brent; US$/b) 25.0 28.7 22.4 20.1Cotton (US cents/lb) 46.2 63.7 81.8 82.8Food, feedstuffs & beverages (% change in US$

terms) 12.7 5.8 2.0 6.9Industrial raw materials (% change in US$ terms) 2.2 12.3 11.4 -0.1

Note. Regional GDP growth rates weighted using purchasing power parity exchange rates.

The global economic recovery is finally under way, and OECD markets areexpected to reach a trend rate of economic growth early in 2004. We nowexpect world GDP growth to rise by 4.3% in 2004, easing slightly to 4% in 2005,following 3.5% growth in 2003. GDP growth in the US—the destination ofaround 28% of Bangladesh's merchandise exports in 2002—will pick up to 4.2%in 2004, from 3.2% last year, before moderating to 3.1% in 2005 as the boostfrom tax cuts begins to wane. Growth in the EU—Bangladesh's main tradingpartner—will pick up more slowly, but will reach 2.2% in 2005. World trade ingoods should rise to 6.6% in both 2004 and 2005 from 4.3% last year—still wellbelow the 12.9% growth recorded in 2000. We expect annual average crude oilprices (dated Brent Blend) to slide to US$22.43/barrel in 2004 and US$20.07/b in2005, from US$28.69/b in 2003.

We forecast that Bangladesh's real GDP growth will reach 5.7% in 2003/04, upfrom 5.3% in 2002/03, before rising to 5.8% in 2004/05. An improvement islikely in agricultural sector growth in the current fiscal year, to 5% comparedwith 3.3% in 2002/03, partly owing to government incentives. Manufacturingoutput growth should also improve in 2003/04, rising to 7% from 6.6% in2002/03, in line with a strengthening world economy. Exports are forecast torise in response to improved demand in Bangladesh's main trading partners.However, the increase in exports will be limited by infrastructuralweaknesses, and Bangladesh's principal industrial export, garments, will face

International assumptions

Economic growth

10 Bangladesh


intensified competition—especially from China-based producers—in the USand EU markets.

Government-instigated improvements in the business environment, combinedwith better export prospects, are expected to provide the conditions for amodest acceleration in investment growth in the latter part of the forecastperiod. In 2004/05 exports are expected to rise more rapidly, and industrialgrowth will remain strong. However, some reduction in the pace of agriculturalgrowth may be recorded, following a good year in 2003/04. The positiveoutlook for 2004/05 depends on continued support for Bangladesh by themultilateral institutions, which are encouraging the government to press aheadwith around 100 privatisations over the next couple of years. The BNP hasstronger links with the private sector than the previous AL-led government, butthe pace of privatisation will remain hostage to domestic political instability.

In month-on-month terms, consumer price inflation has continued to edgeupwards. Prices rose by 0.9% in August 2003 (the latest available data),following a 0.5% increase in July and a 0.3% rise in June. In year-on-year terms,however, the rate of inflation moderated to 5% in August from 5.1% in July and6% in June, owing to a high base of comparison provided by the latter monthsof 2002. The increase in the consumer price index reflects a seasonal rise infood prices and an increase in fuel prices that pushed up distribution costs inearly 2003, as well as the rapid growth in money supply. Non-food priceinflation has also risen, although to a lesser extent, owing to improvedexchange-rate stability and the government's fiscal tightening. Consumer priceinflation is forecast to average 6.4% in 2004-05, following an estimated rise of5.4% in 2003 as the government attempts to raise fuel prices to levels that arecloser to international prices.

The taka has remained relatively stable since the currency was floated onMay 30th 2003, closing at Tk58.88:US$1 on January 22nd 2004, compared witha central rate of Tk57.9:US$1 before the flotation. The central bank has said thatit will intervene periodically in the currency markets to defend the taka, apolicy implemented just after the float to prevent an excessive depreciation ofthe currency against the US dollar. The currency remains vulnerable, however,as merchandise exports are heavily reliant on garments, an export categorywhere foreign competition is increasing. Furthermore, in 2003 the externalbalance was supported by strong growth in workers' remittances; the increasein these inflows may prove more modest in future years. We forecast that thetaka will depreciate to an average of Tk60.48:US$1 in 2004 and Tk63.06:US$1 in2005.

The global economic upturn will underpin a recovery in merchandise exportsduring the forecast period. However, the recovery in Bangladesh's merchandiseexports will be limited by stronger competition from other producers in thecrucial garments market. The merchandise trade deficit will widen as importsexpand rapidly in response to recovering domestic demand. Elsewhere on thecurrent account, the sharp increase in inflows of remittances from Bangladeshiworkers abroad that was recorded in the first half of 2003 is unlikely tocontinue at the same pace. The current account is likely to fall back into deficit

Exchange rates

External sector

Inflation

Bangladesh 11


in 2004 and 2005 as a proportion of remittances reverts to informal channels,although the deficit will remain small as a proportion of GDP. An upturn inforeign direct investment cannot be expected until Bangladesh decides to allowgas exports, but the overall balance of payments will be supported by greaterinflows of aid from the World Bank and other multilateral donors over theforecast period.

Forecast summary(% unless otherwise indicated)

2002a 2003 b 2004c 2005c

Real GDP growth 4.4 5.3 a 5.7 5.8

Industrial production growth 6.1 4.0 6.5 6.7Gross agricultural production growth 0.0 3.3 5.0 4.0Unemployment rate (av) 2.5b 2.5 2.5 2.5

Consumer price inflation (av) 3.4 5.4 6.5 6.3Short-term interbank rate 16.0 16.0 15.0 15.0

Government balance (% of GDP) -4.4 -4.3 -4.7 -5.0Exports of goods fob (US$ bn) 6.1 6.9 7.6 8.4Imports of goods fob (US$ bn) 7.7 9.6 10.6 11.5

Current-account balance (US$ bn) 0.7 0.0 -0.4 -0.6Current-account balance (% of GDP) 1.6 0.0 -0.8 -1.0

External debt (year-end; US$ bn) 16.5b 18.1 19.6 20.2Exchange rate Tk:US$ (year-end) 57.90 58.86 61.88 64.07

Exchange rate Tk:¥100 (av) 46.18 50.20 57.88 59.21Exchange rate Tk:€ (year-end) 60.72 74.25 86.63 85.85Exchange rate Tk:SDR (year-end) 78.72 87.47 96.98 98.11

a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts.

12 Bangladesh


The political scene

The prime minister, Khaleda Zia, in January 2004 unveiled plans to increase thenumber of members of parliament (MPs) to 450 from the current 300. Theruling Bangladesh Nationalist Party (BNP) had pledged to increase the numberto 500, but the architecture of the parliament building will allow for only 450MPs. Of the new seats, 50 will be reserved for women and allocated to theparties in proportion to the number of MPs gained in elections to the other 400seats. As the ruling party has a two-thirds majority in parliament, it is able tochange the constitution, and Mrs Zia plans to introduce legislation toimplement the change in the parliamentary session that began on January 18th.

On January 10th Bangladesh's main opposition party—the Awami League (AL)—issued a one-month ultimatum to the ruling coalition government, led by theBNP, to meet its demands or step down. If the demands are not met byFebruary 10th, the AL claims that it will "compel the government to resignthrough a mass movement". The former prime minister and leader of the AL,Sheikh Hasina, who lost power in the October 2001 general election, in whichthe BNP-led coalition won a landslide, has alleged that Mrs Zia's governmenthas crippled the economy, made parliament dysfunctional, politicised theadministration, patronised criminals and amassed wealth illegally during itstwo-year rule. The demands of the AL include ensuring security of public lifeand property; preventing corruption and the formation of an independent anti-corruption commission; checking increases in prices for essential goods;ensuring freedom of speech and the rule of law; a moratorium on theretrenchment of workers in state-owned industries and the reopening of closed-down businesses; the termination of the village government system andreinstatement of the subdistrict local government system; and ensuring theaccountability and neutrality of the caretaker government (which overseeselections) and the transparency of the Election Commission. The party has alsoannounced a month-long programme to organise protest rallies across thecountry culminating in a nationwide dawn to dusk hartal (general strike) onFebruary 12th if the demands are not met.

The AL in the meantime has continued its boycott of parliament that beganwith the budget session in June 2003. The AL is demanding three apologies—one from Mrs Zia; one from the speaker, Zamiruddin Sirkar; and one from astate minister, Alamgir Kabir. The apology demanded from the prime ministerrelates to her referring to Shah Mohammad Abu Zafar, a BNP member who isnot a parliamentarian, as the unofficial MP for Faridpur; that from the speakerfor his recent comment that parliament runs smoothly without the presence ofopposition members; and that from Mr Kabir for allegedly derogatorycomments on the floor of parliament about Sheikh Hasina. The new session ofparliament began on January 18th, with no sign of the opposition AL joining it.

In mid-November 2003 parliament amended the Code of Civil Procedure forthe third time in the same year, in order to discourage the filing of false casesand expedite the disposal of civil suits. The law also restricts ex parte

The AL issues an ultimatum tothe ruling coalition

The AL continues its boycott ofparliament

Civil procedure codes areamended

The number of MPs will beincreased

Bangladesh 13


injunctions sought by a private party that may interfere with publicdevelopment programmes or harm the public interest, and provides for acompensatory cost of up to Tk10,000 (US$170) where the applicant loses thesuit. The bill faced little opposition in parliament, owing to the ALparliamentary boycott. But G M Qader, an opposition MP belonging to theJatiya Party (Ershad), blamed the government itself for delays and the filing offalse cases, claiming that the government was responsible for 80-90% of civilsuits.

In mid-November the Supreme Court reprimanded the government for itsfailure to implement the Court's four-year-old 12-point directive aimed atseparating the judiciary from the executive branch of the government. TheCourt gave the government four more months to implement the directives—the15th of such extensions since the Court originally issued the directives onDecember 2nd 1999. One of the main reasons for the procrastination bysuccessive governments in implementing the Court's directives relates to thefact that the separation of the judiciary from the executive branch ofgovernment would require the enactment of new laws, and this in turn raises aconstitutional issue whether the judiciary is entitled to instruct the legislature toenact a law.

For the third year in a row Bangladesh has been ranked as the most corruptcountry among the 133 nations surveyed by the Berlin-based TransparencyInternational (TI). In its corruption perception index (CPI) 2003, Bangladeshwas rated 1.3 on a scale of 10, where 10 means "least corrupt" and 0 means"most corrupt". However, this represents an improvement compared with the0.4 scored in 2001 (when 91 countries were surveyed), and the 1.2 scored in2002 (when 102 countries were surveyed). Bangladesh's close neighbours—India, Pakistan and Sri Lanka—were placed well above Bangladesh, with scoresof 2.8, 2.5 and 3.4, respectively. The CPI seems to have an impact onBangladeshi politics. In 2001 when TI first ranked Bangladesh as the mostcorrupt country, the current ruling party—the BNP—sought to gain politicalmileage in the 2001 general election by using the index as proof of corruptionunder the then ruling party, the AL. Now that TI has published the sameranking for Bangladesh in 2003, the finance minister, Mohammad SaifurRahman, has rejected the report saying, "it is not correct to condemn a nationon the basis of some unproven allegations reported by newspapers and thegeneral impressions of some people".

Local press reports indicate that law and order deteriorated further in 2003, asmany hard-core criminals remained at large, despite occasional combingoperations by the government and several speedy trials that gave the deathpenalty to score of convicted murderers. According to a report in the Daily Star,a Dhaka newspaper, surveys carried out by some non-governmentalorganisations (NGOs) suggest that in 2003 the number of homicides rose to3,450 from 2,773 in 2002, rape incidents nearly trebled to 327 from 119 in 2002,incidents of "police repression" jumped to 1,879 from 439 in 2002, and thenumber of abductions rose to 1,346 from 840 in the previous year.

The separation of the judiciaryis further delayed

Bangladesh is ranked the mostcorrupt country

The law-and-order situationdeteriorates

14 Bangladesh


According to the Bangladesh National Women Lawyers' Association (BNWLA),a local NGO, attacks on women and other violations of human rights increasedin 2003: 266 women were killed by their in-laws, 26 were burnt with acid, 124were tortured in dowry-related violence and 562 women were compelled tocommit suicide for other reasons. According to another NGO—Odhikar, whichfocuses on human rights—436 people were killed, 6,281 were injured and 2,381were arrested in incidents of politics-related human rights violations in 2003,compared with 420 killings, 8,741 injuries, and 5,717 arrests in 2002. Odhikaralso claims that in 2003 90 people died in police custody or in prison,compared with 104 in 2002. In 2003, according to Odhikar figures, 477 childrendied in incidents of human rights violations, 339 were injured, 499 were raped,308 were abducted, 61 were acid victims, 46 were arrested, there were 130 casesof trafficking in children, and 101 committed suicide. By contrast, in 2002 445children died in various instances of human rights violations, 171 were thevictims of trafficking and 183 committed suicide.

Last year also saw the death of 23 leaders and activists of the AL and 22 of theBNP. Among the political murders, that of the AL president in Khulna City,Alhaj Manjurul Imam, in August 2003 created a sensation throughout thecountry. In the same year 12 policemen were also killed in 14 incidents ofbombings and armed attacks on the police in the south-western region of thecountry. Some abduction cases, such as that of a Chittagong businessman,Jamal Uddin Ahmed Chowdhury, eroded public confidence in law-enforcementagencies. In the same year unprecedented amounts of illegal arms andexplosives were recovered in several parts of the country, including the capitalcity, Dhaka. Three journalists were killed, 102 were injured and 39 wereassaulted, according to the Ain O Salish Kendra, an NGO that specialises inlegal matters. According to this NGO, 32 political activists were killed and 3,756were injured in clashes between supporters of different political parties in 2003.174 people were killed and 213 others injured in clashes between the activists ofpolitical parties and political extremists.

The government in early January banned all publications of the AhmadiyyaMuslim Jamaat, a Muslim sect whose claim to be Muslims is denied byBangladesh's mainstream Muslim clerics, who want them declared non-Muslims. "The ban was imposed in view of objectionable materials in suchpublications that hurt or might hurt the sentiments of the majority Muslimpopulation of Bangladesh", an announcement by the Ministry of Home Affairssaid on January 8th. Abdul Awal, of the Ahmadiyya Muslim JamaatBangladesh, described the government decision as "religious terrorism". Tensionbetween the Muslim clerics and the Ahmadiyyans flared up recently when agroup of Sunni Muslims under the banner of the Hifazate Khatme NabowatAndolon (movement to protect the ideals of the prophet) gave the governmentan ultimatum to declare the Ahmadiyyans non-Muslims by January 5th. TheAhmadiyyans are a small group whose activities are mainly limited to Dhaka'sNakhalpara and Tajgaon areas, where they have come under attack from rivalgroups in recent months. The government's ban on Ahmadiyyan publicationshas been protested against by various political and social organisations, studentbodies and civic societies, who have termed it a serious breach of the people's

Violations of women's andchildren's rights increase

Political killings increase

Bans are imposed onAhmadiyya publications

Bangladesh 15


right to religious freedom. The Ahmadiyyans, in the meantime, have vowed tofight the ban in the courts instead of agitating on the streets.

Violence in the Chittagong Hill Tracts (CHT) has followed an intensification inthe rivalry among two major tribal parties and intervention by the army tocombat terrorists and seize firearms. Fighting between armed activists of theParbatya Chattagram Jana Sanghati Samity (PCJSS, literally Association ofPeople's Collaboration in the Chittagong Hill Tracts) and the United People'sDemocratic Front (UPDF) came to a climax in mid-December when a PCJSSleader, Tridip Sanker Chakma Russell, was shot dead, allegedly by UPDFactivists. In the meantime, the PCJSS began to agitate for the fullimplementation of the peace treaty signed with the AL government inDecember 1997. It warned of tougher agitation, and even a "people's war" if thegovernment failed to meet its demands. The CHT area has also witnessed acampaign by insurgents in recent months. Troops have on several occasionsexchanged heavy gunfire with insurgents in the deep forests of the CHT andrecovered explosives, heavy arms and ammunition.

When in opposition, the BNP expressed misgivings about the CHT Treaty,signed by the then AL government with the PCJSS to end the 20-yearinsurgency in the CHT area. The BNP also pledged to scrap the treaty once inpower. Although the BNP-led government has not yet rescinded the treaty,PCJSS leaders and the AL are concerned about its intentions. At a meeting ofthe Parbatya Gano Parishad (the CHT regional council) in late December, thechairman of the parliamentary committee on CHT affairs, Mosharraf Hossain, aBNP MP, demanded the cancellation of the CHT treaty and called upon thegovernment to launch a combing operation against the terrorists operating inthe hills and to establish equal rights for both tribespeople and Bengalis in thearea. However, the BNP secretary-general and minister for local government,Abdul Mannan Bhuiyan, has expressed his government's commitment toimplement the treaty step by step. Mr Bhuiyan said in December 2003 that thegovernment would transfer three more institutions—the primary educationtraining institute under the Ministry of Education and two institutions underthe youth and sports ministries—to the CHT regional council in order toimplement the peace agreement.

Fifteen Bangladesh army officers, serving with the UN peacekeeping missionsin Sierra Leone and Liberia, died in a plane crash on December 25th in Benin.Of the army officers, killed along with 140 civilians, 13 served in Sierra Leoneand two served in Liberia. The officers were coming home on vacation, officialsources said, adding that this was the single largest casualty figure for theBangladeshi army since the country's independence in 1971. Currently about4,500 Bangladeshi troops are deployed in nine UN peacekeeping missionsaround the world, of which 1,504 are in Sierra Leone, 1,327 in the Congo andaround 1,000 in Liberia.

Official talks between the commanders of the Bangladesh Rifles (BDR) and theIndian Border Security Force (BSF) held in the Indian capital, New Delhi, inearly January ended without any agreement as the countries exchanged

Violence mounts in theChittagong Hill Tracts

The government sends mixedsignals on the CHT Treaty

Bangladeshi peacekeepers diein a plane crash

Bangladesh and Indiaexchange insurgency charges

16 Bangladesh


accusations of support for insurgency movements in each other's territory. AjaiRaj Sharma, the head of the Indian BSF, claimed that there were 194 rebelcamps operating from Bangladesh against India and handed over a list of 100insurgents allegedly operating from Bangladesh. His counterpart, Jahangir AlamChowdhury, the head of the BDR, denied the existence of any such camps orinsurgents in Bangladeshi territory, and claimed that there were 39 rebel campsoperating against Bangladesh from India and handed over a list of 91insurgents. Mr Chowdhury maintained that the camps were located in theIndian states of Assam, Mizoram and Tripura, adding that many of the ShantiBahini insurgents who had not surrendered in 1998 following the CHT treatywere conducting insurgency activities with Indian assistance. He also claimedthat two other extremist groups were carrying out insurgency activities andfomenting communal tensions in southern and south-western districts ofBangladesh with Indian assistance.

The leaders of the seven south Asian countries—Bangladesh, Bhutan, India, theMaldives, Nepal, Pakistan and Sri Lanka—attended the 12th summit of theSouth Asian Association of Regional Co-operation (SAARC) in the Pakistanicapital, Islamabad, in early January, and reached a landmark agreement, calledthe Islamabad Declaration, committing themselves to fighting terrorism andpromoting economic growth through a regional free-trade zone. Thedeclaration, signed by the SAARC foreign ministers in the presence of theirheads of government and state, covered co-operation in economic develop-ment, poverty alleviation, science and technology, information andcommunication, and the security of small states. The SAARC leaders alsocommitted themselves to promoting good neighbourly ties based on sovereignequality, territorial integrity and national independence, non-intervention andthe peaceful settlement of disputes. The declaration also emphasises thebroadening of economic co-operation among member states to ensure theequitable distribution of the benefits of trade and to cater to the special needsof the small and less developed members. The Islamabad Declaration alsorecommended a study of energy co-operation in South Asia and called for thestrengthening of transport, transit and communication links across the region.Under the agreement, a free-trade zone, to be known as the South Asian FreeTrade Area (SAFTA), will come into effect from January 1st 2006. India andPakistan, as the more developed members of SAARC, will have until 2009 toreduce their tariffs to 5% or below; Sri Lanka has been given until 2010; andBangladesh, Bhutan, the Maldives and Nepal have until 2013 to comply. Eachcountry will maintain a sensitive list of products excluded from the tariffreductions.

In our Country Report (Bangladesh) of July 2003, we referred to allegations ofmisuse of funds intended for poverty alleviation brought against an NGO,Proshika, following an investigation by the NGO Affairs Bureau, a governmentbody. We should like to make clear that our report was entirely based on anarticle in New Nation dated May 18th 2003, no official report having beenpublished by the government. It also contained several incorrect figures,relating to amounts paid or allocated by Proshika, which we had inaccuratelytransposed from New Nation. Proshika rejects the allegations of donations to

Bangladesh signs theIslamabad Declaration

Editor's note: Proshika

Bangladesh 17


politically motivated programmes. It claims its assistance was government-approved and non-political. It also says it sent 65 staff members abroad forstudy visits and courses, representing a tiny proportion of the amount receivedfrom foreign donors, and that, far from there being discrepancies between itsaccount of receipts of foreign donations, all its accounts are duly audited byinternational accountants. We apologise for any wrong impression our reportmay have caused.

Economic policy

The recent improvement in both domestic and external demand will helpBangladeshi economic growth to accelerate to 5.7% in fiscal year 2003/04 (July-June) from the 5.3% recorded in the last fiscal year, according to an AsianDevelopment Bank (ADB) report published in October 2003. Toru Shibuichi, theADB's country director in Bangladesh, later pointed out that the country'sexports had rebounded to grow by 10.4% in July-October, although imports hadrisen by 21.8% year on year in the same period. Imports of industrial rawmaterials and capital goods augur well for increased domestic industrialactivity, although stronger growth in imports than exports and moderatedworkers' remittances will cause the current account to fall back into deficit.Mr Shibuichi has cautioned that deteriorating law and order might have anegative impact on the economy. He has also stated that the inflation rate,which he said hit 5.6% in September 2003, needed to be moderated.

In October the government announced a three-year import and export policyfor the current fiscal year. The import policy calls for "limited safeguardmeasures" for the protection of local industries, restricts imports of products likecement, coconut oil, medicine and medical equipment, crude soybean andpalm oil, reconditioned vehicles, potatoes and electric metres. The governmentcited public health, safety, the environment, religious sentiment and the qualityof imported products as reasons for imposing such restrictions. The policyraises the value of goods that can be imported without opening letters of credit(LCs) to US$25,000 from the previous limit of US$5,000 to meet the emergencyneeds of industries. The limit for imports of commodities for personal use hasbeen raised to US$5,000 from US$2,000. Garment factories will be allowed toimport fabrics as samples of up to 0.2% of their requirement to speed upproduction. The export policy for fiscal years 2004/05-2005/06 focuses onexport diversification and higher value addition. It envisages a 14% annualgrowth in exports during the period, setting export earning targets at US$7.4bnfor the current fiscal year, US$8.6bn for 2004/05 and US$9.6bn for 2005/06.Export growth is expected to come from the readymade garments, informationtechnology and agro-processing industries, with provisions for soft loans andother facilities for export diversification.

Bangladesh Bank (BB, the central bank) in October 2003 withdrew marginrequirements on the opening of LCs for the import of essential food items,except rice, wheat and sugar, and permitted commercial banks to set their ownmargin requirements as necessary. The steps were taken to encourage imports

The ADB forecasts 5.7% growthin the current fiscal year

A new trade policy envisageslimited protection

Margin requirements forletters of credit are reduced

18 Bangladesh


of food items, including pulses, dates and onions, and other spices—prices ofwhich shot up well ahead of Ramadan, the month of fasting for Muslims.However, the LC margin requirement of 25% for rice and wheat, and 50% forsugar remains unchanged. Also in October the government reduced LC marginrequirements to 50% from 100% for the import of more than 50 commodities.Most of these are, however, luxury items, such as perfume, soap, toothpaste,costume jewellery, chocolate, refrigerators, dry fruits and ceramic tableware.The LC margins were raised to 100% in November 2001, as the governmentfaced dwindling foreign-exchange reserves amid a surge of imports.

The decision to reduce margin requirements fulfils an IMF condition for accessto its concessional loans under the poverty reduction and growth facility(PRGF) scheme. On January 9th 2004 the IMF approved the release of a furtherUS$74m under the PRGF programme, noting that margin requirements hadbeen reformed, economic growth had picked up, external demand hadstrengthened and inflation had remained under control. The IMF pointed to theneed to proceed with reforms of the tax structure and the nationalisedcommercial banks (NCBs).

In December 2003 the US gave Bangladesh six more weeks to decide whether itwould allow trade unions in its export-processing zones (EPZs), where suchactivities are currently illegal. Pressed by the American Federation of Labor-Congress of Industrial Organisations (AFL-CIO), the US government in Octoberthreatened to withdraw trade concessions, such as those granted under thegeneralised system of preferences (GSP) if Bangladesh failed to allow tradeunion activities in the EPZs by January 2004. Bangladesh signed a GSP treatywith the US in 1991, and in 2001 the treaty was extended for three years on thecondition that the GSP facilities would be discontinued unless Bangladeshallowed trade union activities in EPZs.

EPZ investors have long opposed trade union activities. Some progress was,however, made in late December at a meeting attended by the US ambassadorin Dhaka, Harry K Thomas, the finance minister, Mohammad Saifur Rahman,representatives of the AFL-CIO and EPZ investors, at which the World Bankcountry representative in Dhaka, Christine Wallich, was entrusted with the co-ordination of the issue. Mr Thomas, however, made it clear that the US wouldnot extend the deadline further unless trade union activities were allowed inthe EPZs.

In early January the Bangladesh High Court stayed for five weeks the executionof the latest government notification that lifted the ban on trade unionactivities in the EPZs from January 2004. The court order came in response to awrit petition filed by Youngone Corporation of South Korea and 21 investors inthe Chittagong EPZ. Currently Bangladesh's two major EPZs—in Chittagong andDhaka—earn around US$1.2bn annually in export income and employ around130,000 workers in 180 industrial units. However, GSP concessions cover onlyabout US$40m of exports per year.

In a remarkable policy shift in late December, the government empowered theconcerned ministries to liquidate closed down state-owned enterprises (SOEs),

The US presses Bangladesh toallow trade unions in EPZs

Privatisation rules aremodified

Bangladesh 19


apparently curtailing the authority of the Privatisation Commission (PC), anindependent body responsible for the privatisation of SOEs. Mr Rahmanpointed out that the PC will remain responsible for the privatisation of SOEsthat have not been closed down or where employees have not been laid off.The PC was not equipped with adequate facilities and mechanisms to negotiatewith the banks for debt write-offs or other options, Mr Rahman said, addingthat the ministries that own these laid-off units would be better able to waivethe debts of these factories through negotiations with the respective banks orother parties. The PC officials, however, contended that the move would slowdown the privatisation drive, and would create scope for corruption. Currently,more than two dozen SOEs have been closed down, and the government plansto privatise a further 75 within the next three years.

The domestic economy

Economic trends

The broad money supply (M2) grew by 15.7% year on year in the third quarterof 2003 (July-October 2003), compared with the 14.1% and 15.5% year-on-yeargrowth rates recorded in the first and second quarters of the year. Similarly,year-on-year growth of narrow money (M1) accelerated in the third quarter of2003 to grow by 9.3% compared with 5.7% year-on-year growth in the thirdquarter of 2002, although this represents a slowdown compared with the 11.7%rate recorded in the second quarter of 2003. The third quarter of 2003 also sawsignificant growth in domestic credit, which was up by 11.7% year on year.Domestic credit to the private sector was up by 17.6% year on year in Septemberto Tk809bn (US$13.9bn).

Money supply(Tk bn unless otherwise indicated)

2002 20031 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr

M1 234.3 241.6 235.4 254.7 246.8 269.9 257.4 % change, year on year 7.3 8.1 5.7 5.1 5.3 11.7 9.3

M2 934.0 986.2 1,015.9 1,069.0 1,066.2 1,139.9 1,175.7 % change, year on year 13.3 13.1 14.9 13.3 14.1 15.5 15.7Domestic credit 913.7 951.4 960.3 1,027.5 1,026.2 1,039.8 1,073.1 % change, year on year 15.0 13.1 10.1 12.8 12.3 9.3 11.7

Source: Bangladesh Bank, Economic Trends.

Inflationary pressures in the economy reflect the increase in the money supply,higher foreign aid flows, increases in the prices of state-controlled fuel andwater tariffs, the rebound of export earnings and higher prices for essentialgoods. As a result, consumer price inflation (12-month moving average) reached5.2% in August 2003, up from 4.9% in June and 4.4% in March. The AsianDevelopment Bank (ADB) warned in December of the need to bring inflationunder control.

Inflation rises too

Money supply increases

20 Bangladesh


Consumer price inflation(data for fiscal years are annual averages, base year 1985/86)

2002 20032000/01 2001/02 Sep Dec Mar Jun Aug

Consumer price index 239.9 245.5 253.5 256.3 259.8 262.2 265.9

Inflation (% change, year on year) 1.7 2.4 4.7 4.4 5.9 6.0 5.0Consumer price inflation (%, 12-month moving

average) 1.6 2.4 3.1 3.8 4.4 4.9 5.2

Source: Bangladesh Bank.

The cost of living in Bangladesh rose by 10.5% in calendar year 2003, the highestin a decade, according to the Consumers' Association of Bangladesh (CAB), anon-governmental body that monitors consumer prices. The CAB's calculations,which are based on prices and tariffs for 103 commodities and utility services,do not tally with official inflation data, but are regularly published in localnewspapers and influence perceptions of price movements. CAB figures showthat in 2003 rice prices rose by an average of 5.4%, chicken and eggs prices roseby 19.4%, prices of fuels—petrol, diesel and octane—increased by 13% on average,tariffs for household electricity rose by 26.3%, for water by 10.5% and for gas by7.7%. Rental values for the lower-middle class and the poorer segment of thepopulation in the capital, Dhaka, increased by 12%. According to the CAB, thecost of living rose by 8.5% in 2002 and by 5.4% in 2001.

In early November the government fixed the target for rice procurement for theaman, or wet-season crop, at 200,000 tonnes. The government will directly buy150,000 tonnes of rice from the market, with the rest coming from procurementof 73,000 tonnes of paddy, equivalent to 50,000 tonnes of rice. The price ofaman paddy has been fixed at Tk8.40 (14 US cents) per kg, whereas that of riceis Tk12.8/kg. The procurement drive runs from November 15th 2003 toFebruary 28th 2004.

Rice procurement targets forthe aman season are set

The cost of living rises by10.5% in 2003

Bangladesh 21


Infrastructure

In November 2003 the government allowed the American energy company,AES Corporation, to hand over its ownership of two power plants inBangladesh—AES Haripur and AES Meghnaghat—to CDC Globeleq, a subsidiaryof a British company, the Commonwealth Development Corporation. Under anagreement signed by the Bangladesh government, AES and CDC Globeleq, AEShanded over the corridor and electrical transmission facilities to the state-runPower Development Board (PDB). AES closed down its operations inBangladesh in March 2003, apparently as a part of its global plan to roll backinvestment shares in small and medium-sized power plants in South Asia andthe Asia-Pacific region. The 360-mw Haripur combined-cycle power projectbegan operations in 2000 and the 450-mw Meghnaghat plant wascommissioned in 2001. The government allowed AES to sell its two powerprojects to the British company waiving conditions stipulated in the originalcontract that prohibited the sale of more than 49% of its shares in the first eightyears. AES invested about US$500m to establish the two power plants onbuild-own-operate basis. The plants now meet about one-quarter of thecountry's total power demand.

A study sponsored by the US Agency for International Development (USAID),released in October last year, estimates that power outages cost BangladeshUS$778m a year in lost industrial production. The study, jointly conducted bythe South Asian Regional Initiative for Energy (SARI/E) and the US-basedenergy consultancy, Nexant, on behalf of USAID, observed that the loss wasequivalent to 11.5% of industrial-sector GDP, or 1.7% of national GDP in fiscalyear 2000/01 (July-June). Based on a nationwide survey of 208 installationscovering the main industries, the report found that owing to outages (94%unplanned and 6% planned), nearly 14% of the industrial sector's electricitydemand could not be met by the utility suppliers. According to the study, thefrequency of unplanned interruptions in 2001 averaged nearly one per day,lasting for about two hours, and the number of planned interruptions wasabout one in every two months, each lasting about seven hours. About 64% ofindustrial installations in Bangladesh have standby generators, but theoperation of such facilities throughout supply outages would involve anadditional financial burden at about US$4.5m a year. The report recommendedstrengthening end-user participation in the electricity supply industry,converting unplanned interruptions to planned outages, and introducinginterruptible electricity traffic to industries that can absorb plannedinterruptions without serious disturbance to their production processes.

In a major policy shift, the World Bank in 2003 expressed interest in financinginvestment in the energy sector to tap natural gas potential. Reports suggest thata World Bank mission that visited Dhaka in September proposed a World Bank-assisted investment programme including a three-dimensional seismic surveyto delineate production fields and reservoir studies to improve output. Theproposal also envisages the development of wells to increase production andfractionation plants for liquefied petroleum gas (LPG) and the building of

AES transfers power plants toCDC Globeleq

Power outages cost US$778mper year

The World Bank may providefinance for the energy sector

22 Bangladesh


pipelines from producing fields. Current gas demand in Bangladesh isestimated at 1.25bn cu ft per day, and it is expected to rise to 1.6bn cu ft/d by2007 as demand for gas continues to grow at a rate of 7-8% per year.Petrobangla, the state-run gas monopoly, has proposed three fractionationplants, each at a cost of US$25m, to be built by the private sector and operatedon the basis of a processing fee. With respect to the petroleum downstreammarket, Petrobangla proposes to build a pipeline from the port city ofChittagong to Dhaka. World Bank financing of these projects would be subjectto a full feasibility study and assessment of environmental and social impacts.

In December the government decided to allow GMG Airlines, a private airlineoperating on domestic routes since 1998, to operate on international routes, andgranted it a licence for two weekly flights on routes from Dhaka to Colombo inSri Lanka via Madras (Chennai) in India, Dhaka to Male in the Maldives viaColombo, and Chittagong to Chiang Mai in Thailand from January 2004. This isthe first time that the Civil Aviation Authority of Bangladesh (CAAB) hasallowed a private airline to fly international routes, which had so far been amonopoly of state-run carrier, Bangladesh Biman. Bangladesh does notcurrently have direct air links with Sri Lanka and the Maldives, and thenecessary agreements need to be signed with these countries to allow GMG tofly to Colombo and Male. GMG earlier applied for the Dhaka-Kolkata(Calcutta), Dhaka-New Delhi, Dhaka-Kathmandu and Chittagong-Calcuttaroutes, but all flight frequencies available to Bangladesh for these routes arenow covered by Biman. Instead of sharing those routes with the private sector,the government decided to allow the private sector to fly new routes.

The CAAB issued a provisional licence to GMG on September 25th 2003, alongwith two other domestic airlines—Bismillah Airlines and Air Bangladesh—to flyinternational routes subject to the completion of specified requirements.However, only GMG has satisfied those requirements. Currently, with two 37-seater Dash 8-100s and a 50-seater Dash 8-300 aircraft in its fleet, GMG offers 28flights a day to Chittagong, Sylhet, Jessore, Barisal and Cox's Bazar from Dhaka.It has to procure new jet aircraft to fly to international destinations, asCanadian Dash 8s are turbo-prop planes, meant for shorter routes.

An advisory committee of the Japanese International Co-operation Agency(JICA) in late October picked two possible sites for the proposed PadmaBridge—Mawa-Janjira or Paturia-Daulatdia. According to the preliminary studyby the JICA advisory committee, the Padma bridge will be about 6.1 km long ateither of these sites, making it the longest bridge in the country. The biggestbridge in Bangladesh is currently that over the river Jamuna, 4.8 km in length.Built with a nationwide tax levy and massive assistance from the World Bank,the ADB and Japan, that bridge was opened in 1998. The final site selection forthe bridge over the Padma river will be completed by next March, so thatconstruction of the bridge can be started in 2005.

The government has, however, not been so lucky in arranging foreignassistance for its plan to construct a 45-km proposed "Bangladesh-Myanmarfriendship road" to establish road links between Gumdum (in Bangladesh) and

A Bangladesh-Myanmarfriendship road is to be built

Probable sites for the PadmaBridge are selected

Private airlines will flyinternational routes

Bangladesh 23


Buthidong (in Myanmar). Consequently, in late December the governmentdecided to finance the project on its own. It will cost the country about Tk1.5bn(US$25.5m), and the project is to be completed early in 2004. Myanmar isexpected to construct the remaining 50-km stretch from Buthidong to Chakto toconnect the Burmese capital, Yangon, with Bangladesh. The two governmentsalso plan to construct a bridge over the river Naf as well as a 34-km Ramu-Balukhali road in Bangladesh and a 25-km Tangobra-Balibazar road in Myanmaras a result of agreements reached between the prime minister, Khaleda Zia, andher Burmese counterpart, General Than Shwe, during Mrs Zia's visit to theBurmese capital, Yangon, in March 2002.

Financial and other services

If the magnitude of oversubscription of almost all the initial public offerings(IPOs) floated in the capital market in 2003 is any indication, Bangladesh'scapital market has regained investors' confidence. First of all, the number ofIPOs increased in 2003, when 14 IPOs worth Tk1.4bn (US$24m) were floated,compared with eight IPOs worth Tk252m (US$4.4m) in 2002. Second, in 2003the IPOs were oversubscribed 19.5 times compared with 3.7 times in 2002. Onlytwo IPOs–those floated by Khaja Mosaic and Daffodil Computers–wereundersubscribed last year. Third, a total of Tk1.6bn entered the capital market in2003 through pre-IPO placements, whereas the amount was only Tk198m in2002. Of the 14 IPOs floated last year, six were in the financial sector, four inmanufacturing, two in information technology, one was an asset-managementcompany and the other one in the cement sector.

Stockmarket indicators, 2003(Dhaka Stock Exchange)

Mar Jun Sep NovDSE weighted average share price index 822.5 823.14 823.23 823.73

DSE-20 948.3 1,060.4 980.7 1,190.5Market capitalisation (Tk bn) 64.6 72.6 70.3 85.6Daily average turnover (Tk m) 68.1 95.1 30.3 89.5

Source: Dhaka Stock Exchange.

The share price indices of both Bangladeshi bourses—the Dhaka Stock Exchange(DSE) and the Chittagong Stock Exchange (CSE)—have recorded substantial gainsin recent months. The DSE general index ended at 956.14 on January 11th 2004,compared with a September 2003 monthly average of 789.74. The DSE-20 index,the country's blue-chip index introduced in January 2001, closed at 1,198.95 onJanuary 11th 2004 compared with 983.3 on September 28th 2003. Thecontroversial weighted average share price index—which poorly reflected day-to-day share price movements—was withdrawn from both the Dhaka andChittagong bourses in December.

Bangladesh's bourses are finally set to begin scripless stock trading under anautomated system called the central depository system (CDS) fromJanuary 24th 2004. Replacing age-old paper scrips, the current mode oftransaction in the stock exchanges, the CDS will introduce electronic

Scripless trading will begin inJanuary 2004

Share prices show substantialgains

Investors' confidence in thecapital market is restored

24 Bangladesh


transaction and settlement of shares. In December the Securities and ExchangeCommission (SEC, the regulatory body for the stock exchanges) awarded alicence to Central Depository Bangladesh Limited (CDBL) to facilitate thetransition. In the first phase, share transactions of Square Pharma, a blue-chipcompany listed on the DSE, will be brought under the CDS. The CDBL willprovide scripless trading services through depository participants who will beaccountable to the CDBL and the SEC. So far, the SEC has issued 25 licences forsuch depository participants. All shares are to be dematerialised (that is, madescripless) for settlement through the CDS in phases. Initially, issues of "A"category companies—blue-chip companies—will be given priority fordematerialisation. Companies listed with the bourses will pay fees rangingfrom Tk5,000 (US$85) to Tk100,000 annually for the CDS, depending on theamount of their paid-up capital.

Facing growing pressure from investors, as evidenced by the oversubscriptionof IPOs by almost 20 times, the SEC in December changed the existing systemof share allotment against IPOs. Under the new system, in the case ofoversubscription all applicants will be considered as applicants for a minimumof one lot, and only the additional lots will be distributed to the applicantswho sought larger shares. In the case of undersubscription, all applicants willreceive the number of shares that they applied for, and the rest will have to bebought by the underwriters. The distribution of all IPOs will be brought underthe CDS, and intended investors in IPOs will have to open an account with adepository participant.

The SEC has extended to end-December 2005 the deadline for changing theownership pattern of brokerage firms from "proprietorship" to "limitedcompanies", owing to the time-consuming legal and financial process involved.The earlier deadline for extension expired at end-2003.

Recent reforms in the banking sector, such as the writing-off of bad loans andimproved checks on new loan disbursement, largely implemented to fulfilconditions of a US$490m IMF credit support under a three-year povertyreduction and growth facility programme, appear to have yielded good resultsin reducing default loans in the banking system. According to Bangladesh Bank(BB, the central bank), default loans dropped by about 4 percentage points—Tk27.1bn—between January and September 2003. Classified loans inSeptember 2003 accounted for 24% of total loan portfolios compared with 28%in December 2002. According to BB sources, the nationalised commercial banks(NCBs) reduced their classified portfolios by 2.7 percentage points, the privatecommercial banks (PCBs) reduced default loans by 2.6 percentage points, theforeign commercial banks (FCBs) reduced bad portfolios by 0.6% and thedevelopment financial institutions (DFIs) by 8%. On September 30th 2003 thetotal loans of the banking sector were Tk886.5bn, of which Tk212.5bn wasclassified, whereas in December 2002 the figures were Tk852.7bn andTk239.6bn, respectively. The NCBs reduced their classified loans to Tk110.5bnfrom Tk121.8bn; the PCBs reduced their classified loans to Tk52.8bn fromTk54.8bn; the DFIs reduced their classified loans to Tk47.9bn; and the FCBsreduced such loans to Tk1.2bn.

Default loans drop by 4%

The brokerage ownershipchange deadline is extended

IPO share distribution isreformed

Bangladesh 25


Meanwhile, Tk2.88bn in default loans and accumulated interest was recoveredbetween May and November 2003 following the introduction of alternativedispute resolution (ADR) under the Money Loan Court Act 2003. The new law,which replaced the earlier money loan court, provides for the disposal of casesin just three months. In May-November the courts disposed of 6,352 cases and afurther 1,426 cases were settled through the ADR. Currently, over 40,000 casesare pending with various money loan courts across the country.

The banking sector made record operating profits in 2003, totalling Tk21.1bn, ofwhich only 15% was accounted for by the four NCBs that control 50% ofBangladesh's banking market. The balance was accounted for by 31 privatecommercial banks (PCBs), both domestic and foreign. The PCBs' 2003 profits ofTk17.9bn were 28% higher than their operating profits in 2002, which stood atTk14bn. Banking sources attributed the success of the PCBs to a significantincrease in transactions, owing to an upswing in exports and imports, a widespread between lending and deposit rates (ranging between five and sixpercentage points), and an increase of investment in several sectors, such aschemicals and pharmaceuticals. Among the PCBs, the Islami Bank topped thelist with profits of Tk2.18bn in 2003, registering a 38% year-on-year increase.Other banks that crossed the Tk1bn profit mark included the Uttara Bank(Tk1.2bn), the Prime Bank (Tk1.1bn), the National Bank (Tk1bn) and the PubaliBank (Tk1bn). The poorer performance of the NCBs is largely connected withsubstandard service, ongoing reforms and the loss of competent staff to PCBs.

Foreign trade and payments

Bangladesh's export earnings rose by 13.2% in July-November 2003 comparedwith the year-earlier period. The export value for the period stood atUS$2.97bn, compared with US$2.63bn in July-November 2002. Export pricesdipped by 1.4%, according to the Export Promotion Bureau (EPB), but thevolume of exports rose by 14.6%. EPB data show that export earnings from bothprimary and manufactured products recorded higher growth during theperiod—whereas primary products exports grew by 9.1%, export earnings frommanufactured products grew by 13.6%. Among manufactured exports, knitweargrew by 23%, woven garments by 10.6%, frozen food by 10.3%, tea by 23%,engineering products by 12%, ceramic tableware by 35.2%, footwear by 39% andhome textiles by 55.5%. Among major manufactured exports, woven garmentsearned US$1.36bn, knitwear earned US$865.8m, frozen food earned US$179.7mand leather US$80.8m. Among agricultural exports, raw jute earned US$32.6mduring the period.

November was a particularly good month for export earnings. The value ofexports reached US$558m, US$118.6m higher than in the year-earlier period.The duty-free and quota-free access to some Western markets enjoyed byBangladeshi woven and knitwear goods, which contribute about 75% of totalexport income, aided the rebound of export earnings in the month. QaziMoniruzzaman, the president of the Bangladesh Garment Manufacturers' andExporters' Association (BGMEA), said that exports to the same countries wouldincrease further in the months ahead.

Money laundering is detectedin three banks

The banking sector is awashwith profits

Export earnings rise by 13%

26 Bangladesh


The value of imports, calculated on the basis of letters of credit (LCs) openedwith Bangladesh Bank (BB, the central bank)—recorded a 26.5% year-on-year risein the first quarter of fiscal year 2003/04 (July-June). There was a rise in importsof almost all commodities that are normally imported, but the rise was mostevident for consumer goods, industrial raw materials, petroleum products andcapital machinery. According to the BB, during the first quarter of 2003/04 LCsincreased by 1.3% for foodgrains, 19.4% for consumer goods, 29.5% for industrialraw materials, 19% for petroleum products, 58% for capital machinery and 19%for other miscellaneous products. The largest value of LCs were opened fortextile fabrics, worth US$227.6m in September alone, which was 18% higherthan in the corresponding month of 2002. The pick-up in imports of textilefabrics points to a recovery in exports of readymade garments, Bangladesh'sflagship export. Higher imports of capital goods will also underpin economicgrowth in the current fiscal year.

Bangladesh's foreign-exchange reserves hit an eight-year high of US$2.65bn onJanuary 4th 2004. The reserves had started to decline in 1996, after reaching arecord US$3.07bn in June 1995. Reserves fell below US$1bn in 2001, barelyenough to cover six weeks of imports. Foreign-exchange reserves, however,have showed a steady recovery over the past two years, and rose aboveUS$2.5bn in the second half of 2003. The accumulation of higher foreignreserves has often involved administrative measures to discourage non-essential imports and extra incentives to channel remittances from expatriatesthrough official channels. Higher export earnings and an increase in foreign aidflows have also helped. In the first half of 2003/04, Bangladeshi expatriatesremitted US$1.6bn and the country received US$209.2m in foreign aid in thefirst four months of the fiscal year. Export earnings grew by 13% year on year inJuly-November 2003.

Foreign-exchange reserves risefurther

But imports surge by 26%

Bangladesh 27


International reserves(US$ bn; end-period)

2002 20032000/01 2001/02 Sep Dec Mar Jun Sep Dec

Reserves 1.31 1.58 1.73 1.72 1.77 2.47 2.50 2.65

Sources: Bangladesh Bank; press reports.

Inflows of remittances from Bangladeshis working overseas grew by 7.5% in thefirst two quarters of the current fiscal year. Thus the country received US$1.6bnin remittances in July-December 2003, compared with US$1.5bn in the year-earlier period. More detailed statistics, available only for the first quarter, revealthat expatriates sent back US$734.7m in July-September, whereas inflows hadstood at US$728.34m in the first quarter of 2002/03. According to press reports,the reason for this relatively slow growth in remittances was the decision of aSaudi Arabia-based exchange house, Al-Razi Commercial Foreign Exchangecompany, to stop payments of foreign currencies to Bangladesh, owing tointernal problems.

Remittances from non-resident Bangladeshis(US$ m)

2002 2003Jan-Mar Apr-Jun Jul-Sep Oct-Dec Jan-Mar Apr-Jun Jul-Sep

Remittances 696.3 690.2 728.4 732.9 785.9 814.8 734.7

Source: Bangladesh Bank.

The Asian Development Bank (ADB) will lend US$530m to Bangladesh in2004/05 for the development of infrastructure and to aid small and medium-sized enterprises (SMEs), according to an announcement in November by theADB director-general for South Asia, Yoshihiro Iwasaki. The credit will be spenton the development of railways, Chittagong port, the capital market and smalland medium-sized ventures, according to the Ministry of Finance.

The ADB has also approved a US$20m loan for a livestock enterprise projectthat aims to enhance income-generating activities in rural areas of 20 north-western districts. The loan, to be distributed through the Palli Karma SahayakFoundation (PKSF, Foundation for Village Work Generation), will benefit about900,000 people through activities involving goat, poultry, dairy and vegetablefarming and small trading enterprises. The project will provide training andmicrofinance to 660,000 households, particularly landless and destitutewomen. The total cost of the project is estimated at US$55.8m, of which thegovernment, non-governmental organisations, the PKSF and beneficiaries willcontribute a total of US$35.3m. The Danish international developmentassistance agency (DANIDA) will provide US$500,000.

The ADB approves a loan for alivestock project

The ADB provides finance forinfrastructure development

Inflows of remittancesincrease

Documents

Bangladesh - iuj.ac.jpBangladesh at a glance: 2004-05 OVERVIEW Bangladesh is likely to remain politically unstable throughout the forecast period, as the main opposition Awami League