Global Trade Bappy

8/9/2019 Global Trade Bappy

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University Of Development Alternative

Bachelor Of Business Administration

Assignment No: 02

Topics Name : Global trade recession

SUBMITTED TO : Abdul Gani

Lecturer

Operations Management

FACULTY OF BUSINESS ADMINISTRATION, BBA

SUBMITTED BY :

Arifur Rahman

18 th BBA

Sec: B

Student ID:081522

Date Of Submission : 30-07-2009.


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A global recession is a period of global economic slowdown. The International Monetary Fund (IMF) takes many factors into account when defining a global recession.

1. Introduction The Bangladesh economy has shown reasonable stability till now despite

the threats from depressed external developments in the back drop of the global financialturmoil. Bangladeshs exposure to the contagion effects of the global financial markets has beenlittle and the countrys financial sector remains largely immune to the global financial turmoil.With continuation of the present economic trends, the economy is likely to grow at around 6percent in FY09. In addition, major macroeconomic indicators have remained reasonably stablein recent times which may continue in the near term provided no major shock afflicts theeconomy.

The financial year 2009-10 (FY10), however, faces multiple downside risks. In addition tothe risks of natural calamities and other unexpected developments that the economy routinelyfaces, the major additional risk for FY10 emanates from the fallout effects of the global financialcrisis. At present, the world economy especially the developed economies have entered into amajor downturn. Along with substantial growth slowdown, the global economic situation is highly

uncertain and subject to considerable downside risks.Several factors, however, could pave the way toward recovery of the world economy

starting from late 2009: (i) likely price stability in the world commodity market leading to the startof an unwinding process of adverse terms of trade effects especially in oil importing countries;(ii) end of the intense drag on US growth by the housing sector leading to the start of therecovery cycle of the financial sector creating positive effect on global financial system and theworld economy; and (iii) resilience and less affected status of emerging economies providing themomentum to recovery for the global economy. But the recovery process is likely to be gradualwhen it comes.

In the backdrop of economic slowdown and unprecedented uncertainty that characterizesthe global economy at present; this note provides some recommendations for the national

budget for FY10.

2. Recent Developments and Implications in Bangladesh Despite the positive near term outlook and good macroeconomic fundamentals, the economy has shown some signs of slowdown especially in terms of export earnings and remittance inflows. It appears that lower trade volume would be the main channel of transmission of global recession includingvolatility/decline in commodity prices of several export items.

In the case of exports, the current trends include the following: (i) overall export growth isstill satisfactory (led by RMGs) although several sectors such as leather, shrimp, jute and jutegoods have been hit hard; (ii) the countrys export of RMGs seems to face low incomeelasticities in the destination markets; (iii) the countrys share in the US market is rising although

export growth in the EU market has somewhat slowed down; and (iv) Bangladesh still has aclear cost advantage over its competitors in RMG exports. Thus, despite coping well with theshock in the export market, export growth could slow down in the coming months creating somepressure in the domestic economy.

Remittances provide an important safety net for the economy both in terms of bringingstability to the external sector and helping to stabilize consumption levels of a significant number of households in the country. Although growth in remittances is still satisfactory, the volume of
http://en.wikipedia.org/wiki/International_Monetary_Fundhttp://en.wikipedia.org/wiki/International_Monetary_Fund


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inflow may face some strains especially in the medium term due to decline in outflow of newlabor and return of migrant labor due to job loss.

In view of the recent developments, the FY10 budget should be flexible enough to faceemerging realities during the year especially in terms of (i) providing support to overcomeadverse impact on economic and social life from possible global recession; (ii) augmenting

investments in key sectors (including energy and infrastructure) by combining prudent short-term and long term measures; and (iii) creating environment for rapid growth and better economic management. In Bangladesh, macroeconomic indicators, including foreign exchangereserves, have improved in FY09. As such, the country is better placed now to adopt somewhatexpansionary fiscal and monetary policies in FY10. This would help in expanding infrastructureinvestments and greater social spending on nutrition, basic education, health care, and other priority sectors.

The need is also to monitor the performance of the export sector especially RMGs andother vulnerable items and take appropriate measures as needed. For FY10 budget, supportmeasures to the export sector may include the following:

(i) Install measures to increase the efficiency of customs, ports, and infrastructure in order toenable the RMG producers/exporters to reduce costs in order to stay competitive.

(ii) Support establishment of backward linkage industries to enhance competitiveness and addstrength to the RMG sector.

(iii) Rationalize policies to help invest in inventories, equipment and raw materials, upgradetechnology, and expand the production base.

(iv) There is also an opportunity to expand nontraditional exports through a mix of exchangerate policies and sectoral incentives.

3. Critical Areas of FY10 BudgetThe present developments bring out nine areas that need priority attention within the

existing framework of the national budget of FY10. These are:

Setting investment priorities: The portfolio of public investment needs to target productivitygains in key sectors including agriculture; electricity and energy development; removingmajor bottlenecks in infrastructure; improvement in investment climate.

Management of likely economic and social impact of global recession: The adverseimpact of the recession is likely to affect the countrys economic and social life during thefiscal year, the extent of which is difficult to predict. The budget needs to accommodatecounter measures especially covering the external sector and related domestic activities.

Resource mobilization: Measures to broaden the tax base and increase the efficiency of taxadministration; tax rationalization; increase non-tax revenues, capital market development.

ODA inflows: Increase inflows along with urging the international financial institutions to come

up with lending without the overly burdensome conditionality of the past along with quickdisbursing facilities since Bangladesh has sound economic policies but is likely to facegreater resource shortfalls during the year due to global crisis.

Size and quality of public expenditure: Align the public expenditure program to strike theright balance between sectoral priorities and long and short term exigencies; ensureproject quality.

Sustaining export growth and remittances inflow: Export diversification and attraction of higher remittance inflows through formal channels .


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Support to agriculture and the rural economy: Areas of support; adequate and timelysupply of credit and inputs at reasonable prices; ensuring fair prices and supplymanagement; rural non-farm enterprises and SME development.

Human resource development-quality and equity issues: Adequate, affordable, andequitable access to quality education and healthcare services.

Social protection issues: Need to adopt cohesive and strategic vision and integratedstrategy for safety net programs; strengthening of existing programs and wider coveragefor hardcore and vulnerable poor and displaced persons due to adverse impact of globalrecession.

4. Recommendations for the National Budget for FY10

A. Enhance prospects of labor intensive growthHigher and sustainable GDP growth requires policies to bring more complementarities

between agriculture and industry. Similarly, pro-poor growth can be achieved through more

labor intensive investments. This is needed especially since recent Labor Force Survey (LFS)data show an increase in the underemployment rate. In this context, growth of agriculture andsmall and medium industries (SMEs) can have a positive impact. In fact many of the exportsectors have higher capital intensity compared with those producing for the domestic market.Therefore, if world economic recession slows down the export sector, policies for encouraginglabor intensive sectors geared to domestic demand can help achieve both ends: acceleration of GDP growth and pro-poor growth through higher employment generation.

B. Support to agriculture Support capacity expansion of technology-related R&D, rationalize the agricultural research

and extension system, provide marketing support (actively involving the private sector) invarious forms to vegetable and horticultural product exporters like providing special

warehouse facilities; Although subsidy to agriculture is a vexing issue in view of the budgetary constraints and its

proper management, subsidy to fertilizer and fuel for irrigation is necessary to ensureprofitability of crop production and food security. If diesel subsidy has to continue in cashform, the principle should be that it may be given as fixed amount per acre of land. For balancing costs of irrigation with diesel-run and electricity-driven equipment, the averagesubsidy per acre for diesel should be around Tk. 1,500 per acre. If instead the governmentintends to lower the price of diesel, it will have to be determined in a manner that thesubsidy equivalent is similar to the above amount. Lowering prices of diesel has twodisadvantages. First, as most farmers buy water this does not guarantee that the pumpowners will fully pass on the lower costs to the farmers. Secondly, this may inducesmuggling across the porous border if prices on the Indian side are higher.

If cash subsidy is given to fertilizer and diesel together (or fertilizer and electricity together),the two may be integrated into a general farm subsidy. However, problems of high or other costs may arise when supply or availability becomes limited. In view of this, the currentpractice of providing fertilizer subsidy may be continued along with bringing moreefficiency in domestic fertilizer production. (ii) Provide special allowable facilities under WTO rules to firms adopting integrated contract farming, processing, and marketing


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(iii)Rationalize the agricultural extension services for technology dissemination and for producing quality and new products for exports; (iv) Review the current distribution system of fertilizer and frame transparent and well-defined criteria for allocating dealership of fertilizer atthe farmers level to ensure timely availability; (v) Support the development of verticallyintegrated marketing systems (for example, involving the NGOs, private firms, supermarkets) for

agricultural products; (vi) Encourage increased output of the fishing, poultry, and livestock sub-sectors especially through providing improved veterinary services and remaining alert againstthe outbreaks of diseases like Avian flu.

One of the victims of the recession is the farm sector which is now reeling under low pricesof food grains. The problem is being compounded by supply-driven policies related toOMS and safety nets for which the demand seems low. In part this is due to the urgentneed to create storage space for procurement of the boro rice. In view of recentdevelopments, it is important to develop a strategy for the next aman rice so that fair prices to the growers are ensured. While higher price of rice affects the poor consumersalong with adverse implications for food security and poverty, a major challenge in FY10

could be to ensure fair prices to farmers in the backdrop of low market prices of foodgrains especially rice. An expansionary monetary and fiscal policy is suggested as under the circumstances, a certain amount of inflation would be manageable.

C. Support to rural economy

Set and ensure transparent and consistent rules for developing the rural non-farm sector especially for the agro-farm system and agro-enterprise development including guidelinesfor food-safety and negotiate favorable terms of access to international markets for ruralproducts; (ii) Facilitate the development of marketing facilities, knowledge-building to

accelerate agribusiness development and create environment for better participation of theprivate sector; (iii) Invest in rural infrastructure especially energy and transport; (iv)Address market failures through sharing regular information and adopting transparentrules and regulations.

Rural energy

Adopt policies with adequate attention to rural and renewable energy issues andincorporating clearer guidelines for private sector investment in the power sector; (ii) Givepriority to allocation of resources and facilitating policies for private investment in forestry,diffusion of improved stoves, and renewable energy technology such as solar and biogasand techniques such as biogas bricquetting for increasing energy efficiency; (iii) Useenergy subsidy efficiently with appropriate targeting to the intended users given both on afuel basis(such as diesel for irrigation) and on the energy system basis (such as solar andbiogas plants); (iv) Adopt an integrated and holistic approach for institutional re-structuringof the sector and examine the feasibility of establishing an Energy Planning, Research andTraining Institute in the country.


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The power sector is in the midst of a long-term crisis. Development of the sector shouldreceive a high priority with adequate allocations in FY10 budget along with measures toattract foreign and/or private investment. (i) Explore the possibility of temporarily divertinggas from other uses (e.g. fertilizer production) to electricity generation; (ii) Undertakemeasures to urgently make available captive power existing in different establishments tothe national grid; (iii) Form expert group to identify problems inhibiting electricitygeneration at full capacity in existing power generating units and implement appropriatemeasures; (iv) Rehabilitate the currently closed small but viable power generating units onan urgent basis to augment short-term power supply; (v) Use load management in a

judicious manner to minimize the losses to the production sectors of the economy; (vi)Undertake a scrutiny of all proposals of new power generation projects and provide quickapproval to viable projects (both short and long-term ones) following rules and regulationsin a transparent manner; (vii) Initiate actions to import electricity from neighboringcountries (e.g. Bhutan and Nepal) through negotiating transparent terms; (viii) Removebottlenecks for expanding coal based electricity generation and explore private sector participation and public-private partnership options; (ix) Energy pricing is a vastlycomplicated issue which has been widely politicized. The government needs to comeforward to institutionalize a formula approach to determining domestic fuel prices linkedwith world market prices and other considerations; (x) Address critical governance issuesin the power sector, particularly those relating to the power purchase agreements whichneed to be reviewed. The present cost plus system needs to be changed to a price capor yard-stick pricing to prevent fraudulent activities.

For the manufacturing sector, (i) Install effective strategies/policies for SME development;(ii) Vigorously promote Bangladeshs ability to attract FDI in manufacturing:; (iii) Initiatemeasures to improving access to quality tertiary (especially technical) education toaddress human capital deficiencies; (iv) Ensure adequate flow of credit to manufacturingactivities and induce the banks to lower the rate of interest for commercial borrowing.

Quality of public expenditure: (i) Undertake a serous exercise of review of all projectsincluded in FY09 ADP and drop all projects of dubious quality using transparent criteria;

(ii) Limit the total number of projects to be included in FY10 ADP at a manageable leveland include only approved projects in line with the budget and PRSP priority objectivesand for which resources are available; (iii) Further streamline the procedure of selection of new projects; (iv) Give priority to selection of projects for which external assistance isavailable through the pipeline and which fit with budget priorities; (v) Direct moreresources to on-going projects which have made the most progress so that the benefitscan be realized within a short period; (vi) Give priority to projects in critical sectors likeagriculture, power, and social sectors.

New areas of public expenditure : (i) Public expenditure along with support to communityinitiatives is necessary to provide people with safe drinking water and access to improvedsanitation and protect them from the adverse health impacts of heavily polluted physicalenvironment. The fund may be used for developing necessary skills, increasingcommunity resilience, and providing technical interventions. Collaboration across theboard among the government, NGOs, communities and the private sector would bringsuccess in these endeavors. .


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E. Increasing Revenue Earnings

Personal income tax

Expanding the tax base : (i) Strengthen administrative drives (especially in areas wherepotential taxpayers are likely to be high and current coverage is low) to expand the tax base,improve administrative efficiency and conduct surveys to identify potential taxpayers; (ii) Further enhance the scope and coverage of the Large Taxpayers Unit.

Tax assessment: (i) Implement a built-in system of strong deterrence and punishment againstwillful tax evaders and non-compliers; (iii) Review the existing personal income tax rate andrestructure to make it more progressive.

Corporate income tax

Exemptions and allowances : (i) Abolish all exemptions and allowances and/or minimize inspecial cases; (ii) Undertake studies to examine the impact of tax holiday and other incentivemeasures and explore relative advantages of alternative options (including ADA or a uniformreduced tax rate) and introduce appropriate changes; (iii) Abolish the exemptions of tax inrespect of capital gains and, in deserving cases, these may be taxed at preferential rates; (iv)Extend the purview of the highest corporate tax slab (45%) applicable in the cases of banks andinsurance companies to include other profit making service industries; (v) Implement a time-bound plan to ensure that all units of the corporate sector implement harmonized andinternational accounting standards as adopted by the ICAB to ensure proper tapping of thecorporate profit tax;

Customs duty

Rationalization: (i) Abolish zero rate of duty except in cases where international treaty or obligations exist or strong humanitarian reasons prevail; (ii) Eliminate all concessionary ratesand, if any duty concession is given under special circumstances, it should be approved by theParliament before or within three months; (iii).Eliminate all dispersions of duty rates within 4-digittariff heads; (iv) Discontinue the practice of making mid-term changes of duty through SROexcept in special cases like natural disasters and other emergencies; (iv) Enhancesupplementary duty on vehicles for personal use and other items generally used by the richer segment in society; (v)Overhaul the PSI services to remove existing loopholes.

Procedural reforms: (i) Reform the customs clearance process to make it more efficient andless time-consuming; (ii) Discontinue the diplomatic bonded warehouses; (iii) Conduct a reviewof duty drawback, rates and coefficients and revise accordingly; (iv). Regularlyreview and frame adequate safeguard duty rules to combat unfair international

trade.

Value added tax (VAT)

Expansion of VAT net: (i) Progressively expand the VAT net to cover all potential products andservices including secondary agricultural products.

Registration and collection: (i) Streamline the registration system at division office level; (ii)Streamline existing VAT rules and orders and simplify the forms and procedures; (iii) Undertake


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measures to introduce VAT inclusive MRP for all products; (iv) Use VAT stamps of differentdenominations for hard-to-tax areas; (v) Collect turnover tax from larger SMEs.

Other taxes

Local level taxes: (i) Local level taxes are yet to be a major source of revenue whilesubventions to local governments are a major drain on the national exchequer. Remedyingthese would necessitate several institutional and policy changes. While the government maylook up the Report of the Local Finance Commission set up in the mid-1990s, there is a scopefor rationalizing the Immovable property tax as well as the urban land development tax. Thelatter, particularly should be imposed at a high rate so that land does not remain unutilized andunproductive for long. (iii) Impose location-specific higher and differential tax rates for land usedfor residential and commercial purposes in large cities (e.g. Dhaka, Chittagong and other citycorporations) and apply the same principle in other cities and upazila headquarters.

Land development tax: (i) Make upward revision in the tax rate; (ii) Bring large agriculturallandowners under the tax net: (iii) Impose location-specific higher and differential tax rates for land used for residential and commercial purposes in large cities (e.g. Dhaka, Chittagong andother city corporations) and apply the same principle in other cities and upazila headquarters.

Non-tax revenue

Land registration : (i) Abolish all discretionary power of Sub-Registrars and simplify registrationprocedure; (ii) Rationalize land valuation by increasing existing rates to reflect market prices indifferent locations; (iii) Rationalize the minimum value of flats and buildings for tax purposesreflecting current market prices and locational variations.

Motor vehicles: Review the current structure of registration fee for motor vehicles and work outa schedule that introduces high fees for high-capacity and expensive cars for personal use.

Tapping special funds: (i) Access special funds for mitigating the adverse impact of globalfinancial crisis or specific development interventions (e.g. in the energy sector) under international protocols. Under the Kyoto protocol of the UNFCCC, the government may accessfunds under the instrument of Clean Development Mechanism applicable for developingcountries (including the LDCs) for setting up power plants using natural gas, rehabilitation of industrial boilers serving as a source of substantial energy loss and deforestation.

Increase ODA inflowsTake initiatives to release, as much as possible, the project aid stuck in the ever-growing

pipeline; (ii) Give priority to address the problems of management and implementation capacityof the aid-financed projects, resolve procurement issues, and ensure timely approval of projectsand regular provision of matching domestic resources; (iii) Improve the quality of government-donor relationship and its effectiveness to address the issue of poorly-designed projects andprovide support to the priorities in the PRSP agenda.

Legalizing black moneyThe issue is contentious and needs careful consideration keeping both equity and

productivity implications. Decision in this regard may be taken based on a study to assess theissues of black money, impact of past policies of legalizing black money, and identify futurecourse of action. If such studies support, the government may consider giving an opportunity tolegalize black money in future under certain conditions. For instance, the legalization processmight (i) involve payment of appropriate taxes (and penalties) such that those who pay taxesregularly are not penalized and people in possession of black money are discouraged to carry


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on with such money in future; (ii) impose strict conditions such as the legalized money can onlybe used for investment in productive sectors such as manufacturing, SMEs, and other prioritysectors specified by the government and would not be directed to real estate, land purchase, or similar activities.

F. Domestic Procurement Program and Public Stock Management In view of the high cost of associated operations, it is important that the government does

not hold more stock than it needs for an adequate national food reserve. Although a lowfood stock of 0.5-0.6 million tons was adequate in the past, this is no longer true in view of the increased volatility of the world grain market. This, along with the increased need toexpand safety net programs and provide emergency relief in times of natural disasters,implies that adequate national food reserve should now range between 1.0-1.5 milliontons.

With effective storage capacity of around 1.2 million tons, the government needs toinvest in expanding storage capacity. In the interim period, the government can explorethe possibility of using the private storage facilities on a rental basis.

For the procurement program, the governments challenge is to set a procurement pricethat sends adequate production signals to the farmers while minimizing costs to thegovernment exchequer. In fixing the procurement price, in addition to costs of production,the expected market price should be taken into consideration.

It is important to recognize that output price support and input subsidies are complementarypolicies, not substitutes. Fertilizer subsidies may be superior to output price support for stimulating agricultural production but an input subsidy cannot stabilize prices or preventthe collapse of post-harvest prices. Both policies are needed and overall costs of thesecomplementary policies should be taken into consideration in planning governmentinterventions.

The policy dilemma in the food grain market is that of keeping prices low for consumersespecially for the low income people while ensuring that prices are high enough to providefarmers the incentive to produce more. In the short run, the government can resolve thisdilemma by providing input subsidies which will reduce farmers cost of production that canbe passed on to the consumers in the form of lower prices. In the medium to long term, theproblem can be addressed by raising the productivity of agriculture so that food can beproduced more cheaply. For this, adequate funds for agricultural research are needed tofoster technological innovation through generation of technologies with tolerance againstbiotic stresses such as pests and diseases and abiotic stresses such as drought, salinityand submergence.

G. External Sector Management An important component of external sector management is to determine how bad the

impact of the recession is on RMG exports, how many firms are likely to be affectedseriously (e.g. forced to lay off workers) and how many have to tighten their belts. If ordersare not forthcoming, handing out cash will not bring those orders back. The onlyreasonable objective would be to attempt to expand market share through greater competitiveness. This means costs will have to be cut wherever possible. Reduction of import duties on raw materials and machinery announced by the government and interest


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rate reduction are steps in the right direction. In addition, export incentives could beconsidered for firms passing a stringent eligibility test, including size and previous

performance (i.e. before the recession). A free-for-all rescue package would be costly andis unlikely to serve the purpose. Firm-level objective should be to stake out new

opportunities with an eye to the future while staying afloat in the short-run. Those firmswho are able to obtain orders in new destinations may be singled out for specialassistance.

For frozen fish, strict adherence to phyto-sanitary standards would seem to be moreimportant than direct incentives. Here, the government needs to strengthen monitoringmechanisms.

For the labor market, a big part of the problem of returnee-migrants is the corrupt nexusthat seems to operate between local and foreign manpower businesses, and theconnivance of officials in both countries. The budget should allocate resources tostrengthen the relevant departments to develop a strategy to weed out such corruption.

The role of the public sector should be guided by the principle that, while the governmentneeds to retain some control over critical markets (especially food) it should not spread outtoo thinly into too many areas. Given scarce capacity and resources, the governmentshould try to enhance its efficiency in basic areas of governance and in meeting thedemand for crucial public goods. The thrust should be not to replace the private sector butto complement it. The notion of unscrupulous traders causing crisis needs to be re-examined.

A Crisis Coping Fund may be created (e.g. covering three years) catering to three types of demand (i) low cost loan for export enterprises facing difficulties with working capital (e.g.payment of salaries/wages, settling of raw material costs, etc.) upon submission of proof that the problem is a recent phenomenon that emerged due to fall in export demand; (ii)low cost employment loan especially for retrenched workers for survival upon producingpapers of losing job due to lay off or closing down of factories; and (iii) low cost fund for returnee migrant workers, from where returnee migrants may take loan to start smallbusinesses or settling their loans taken during migration. A small part of the fund may beallocated for creating a database on returnee workers.

The FY09 budget earmarked Tk. 10,500 million as export subsidy for 13 export-orientedindustrial products. This cash subsidy program may be continued with present rates butdisbursement efficiency needs improvement. The current fiscals arrear is about Tk. 2,430million which is 23 percent of the allocated cash subsidy. Moreover, the government mayconsider increasing cash subsidy rate to 10 percent (from the current rate of 5 percent) for cotton yarn manufacturing enterprises as they face crisis due to competition from Indianyarn.

The budget may allocate specific funds for upgrading skills of workers and entrepreneurs of export industries. A part of this fund may be utilized for the workers of export industries,especially for RMG workers while another part may be utilized for entrepreneurs in sectorslike leather, light engineering, agro-processing etc.

The tax rate on imported capital machinery (textile, leather, jute, garment, pharmaceutical,and others industries) and spare parts was 3 percent in FY09. Given the negative growthof LC opening of capital machinery during July-February FY09 (reduced by USD 330.4million over the same period of the previous fiscal) and relatively depressed investment


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scenario, import duty on capital machinery and spare parts may be set at 1.5 percent.Besides, 1 percent supplementary duty (SD) on capital machinery may be withdrawn.

Customs duty on agricultural equipment like irrigation pumps, diesel engine, and tractors is3.0 per cent at present. In order to reduce the cost of production of agricultural products,this may be reduced to 1.5 percent.

In order to reduce health hazards and environment pollution and augment revenueearnings, customs duty or SD could be increased from 60 percent on raw materials for manufacturing of cigarettes/bidi and other tobacco products and 20 percent on papersused in producing packaging materials of cigarettes.

The duty on computers and peripheral devices could be reduced from 3 percent at presentto zero.

The duties and taxes on luxury goods could be increased in a progressive manner. For instance, the tax rate on cars/vehicles could be made more progressive with the rateincreasing with the value of the vehicles.

H. Human Resource Development-Quality and Equity Issues

Education: (i) Introduce changes to strengthen the monitoring mechanism; (ii) For primaryand secondary education, put emphasis on provision of learning materials and facilities,take necessary steps to improve and modernize the curricula and teaching methods; (iii)Target the children of the poorest and disadvantaged groups such as ethnic minorities andpopulations in char lands, urban slums and squatters, displaced population by riverbankerosion; (iii) Promote special skill training courses and informal learning systems for secondary school dropouts and others to assist them in gaining useful skills andknowledge for both wage and self employment; (iv) Restructure the VET system toimprove its quality and market relevance; (v) Take targeted measures to bring andretainstudents from poor and hard-to-reach families in schools and put emphasis,especially at higher levels, on standardization and monitoring of performance; (vi) Adoptdisaggregated educational goals by region, gender, income groups and other characteristics and work out corresponding disaggregated budgetary allocations and inputprovision strategies; (vii) Select some model schools in district towns and rural areas anduse these as examples of providing quality education along the lines provided by bestschools in urban metropolitan areas; (viii) Set targets for quality improvement for themedium term and provide necessary support for achieving targets, such as adequatebudgetary allocations, incentive package for teachers, stipend and other support programfor children of poorer families especially to complete SSC examination, focus on jobcreation for the youth (especially those below SSC level) by providing special skill trainingcourses and informal learning systems.

Health: (i) Although the epidemiologic transition from communicable diseases of poverty tonon-communicable life-style diseases is still at an early stage, take steps to reduce risky

behavior (e.g. smoking) especially among the poor population; (ii) Address the factorsresulting in low utilization of public health care facilities such as government under-funding, high out-of-pocket expenses at the point of service, poor quality of care, lowpublic perception of availability of quality publicly-provided health services, formal andinformal charges, and lack of medicines in public health facilities; (iii) Make the delivery of public health services more effective that requires not just establishing and equippinghealth centers and hospitals but much more, such as improved health serviceperformance, adoption, if necessary, of alternative delivery mechanisms (such ascontracting NGOs to manage and/or take over the provision of public health care


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5. Concluding RemarksThe budget for FY10 needs proper adjustment within the medium-term macroeconomic

framework (MTMF) so that the present realities and recent macroeconomic and sectoraldevelopments are reflected. Also the budgetary framework should reflect a move toward an

integrated framework to do away with the unrealistic distinction between the revenue and thedevelopment budgets within a stipulated time. Another priority is to evaluate the experience of implementing the medium-term budgetary framework (MTBF) in selected ministries to work outthe mechanisms of efficient working of MTBF.

In the FY10 budget, two issues should also be given special attention in order to ensure itsproper implementation. First, revitalization of the institutional framework to ensure that (i)ministries and agencies work together effectively and efficiently; (ii) various agencies andministries adopt effective ways of communicating and coordinating on strategic issues relatingto budget implementation; and (iii) effective donor coordination is forthcoming to support thebudget priorities. Second, effective and regular monitoring of budget implementation, at bothministry/agency and national levels, needs to be carried out using both input and outputindicators.

The Global Economic Crisis and Its Implications for BangladeshThe current global economic downturn began in the third quarter of 2007with the sub-prime mortgage crisis in the USA. This later spread to other advanced economies and then, in the third quarter of 2008, developed into amuch wider credit and banking crisis that impacted on the global demand for goods and services. The effect on the global economy has been dramatic. InApril 2008, the IMF forecast global economic growth in 2009 at 3.9 percent, a

year later its forecast was for the output in 2009 to contract by 1.3 percent.A year ago (during the last quarter of 2008) it was expected that theimpact of the credit crisis would be contained and largely confined to theadvanced economies. This is no longer the case. Although the crisis has hitthe advanced economies most severely, where output is now forecast tocontract by 3.8 percent in 2009, the developing economies have also beenaffected. The rapid growth in recent years enjoyed by the developing Asianeconomies, which had peaked at 10.6 percent in 2007, is forecast to slipdownward to 4.8 percent in 2009. This is particularly worrying for Bangladesh,where exports of ready-made-garments (RMGs) and remittances fromexpatriate Bangladeshi workers are important drivers of economic growth. Asa result Bangladesh may experience the effects of the sharp reduction in theglobal trade which is expected to contract by 11.0 percent during 2009, andthe contraction of labour markets in the Gulf following the plunge in oil prices

at the end of 2008.


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Origins of the Global Financial CrisisThe global financial system has suffered a severe and virtually unprecedented blow, leading to the failure of anumber of major financial institutions in developed countries and a worldwide economic slowdown with itsaccompanying job losses, an erosion in consumer and business confidence, and a tightening of credit. This hasforced government intervention on a massive scale in a number of countries, through expansionary monetary

and fiscal policies. This crisis reflects the fallout from acute economic and fiscal imbalances that developed inthe first half of the decade. An overly accommodative monetary policy in 2001 resulted in a dramatic increasein economic growth, which led to an increase in the available funds for loans and investments. It also resultedin a dramatic shift in the terms of trade balances between countries, illustrated by the growing current accountsurpluses in Asia and the increasing deficit in the USA. The world became awash with liquidity, with fundschasing any opportunity for good returns. Policy initiatives in 2004 further fuelled the liquidity bubble. In theUSA, low-income earners were encouraged to buy homes with little or no equity and the banks moved toproviding low-income mortgages. Investment banks benefited from less stringent rules that permitted them toincrease their leverage ratios. Changes in international bank regulations opened opportunities for banks toaccelerate their off-balance sheet activities. In many countries, this credit bubble translated into higher realestate prices and abnormally strong returns in equity markets. It also fuelled growth in non-traditionalfinancial products, such as financial derivatives and complex structured products. The complexity of theseproducts made assessing risk and providing oversight more and more difficult, outstripping the ability of regulators and credit rating agencies to keep pace with developments. The traditional regulatory frameworkwas structured to address conventional retail banking, not the new providers of credit: investment banks, hedgefunds pension funds and other non-retail bank entities. As with all financial bubbles, it was only a matter of timebefore events triggered a correction. That occurred when a rebalancing of monetary policy led to tighter creditconditions in late 2005 and early 2006. As a result, U.S. house prices peaked in 2006 and U.K. prices shortlyafter. However, it was only in mid 2007 that the true financial consequences began to be recognized. Theresulting financial losses significantly impaired the balance sheets of many financial institutions, as assets weremarked down but liabilities remained unchanged. This led to a shift in cash hoarding and the unwillingness tolend between financial firms. The combination of these developments caused credit to become less availableand more costly. The value of stocks fell dramatically around the world, household wealth declined and in manyindustrialized countries and many advanced economies fell into recession. Central banks and governmentsresponded aggressively by lowering interest rates, providing assistance to financial institutions, increasingpublic expenditures and reducing taxes. These policy actions should eventually restore stability to the financialsystem and spur economic growth.

Impacts on Bangladesh1.7 Although it is now clear that the on going global crisis will have asignificant impact on Bangladesh, its impact is still expected to be less severethan in most other economies. The reasons for this include: Bangladeshs relatively limited exposure to the global economy,particularly in export (about 18.0 percent of GDP); Bangladesh largely exports garments which are mainly low pricedproducts for the lower end of the market, demand for which has beenrelatively recession resistant; the continued importance of domestic agriculture as a driver of economic growth, which performed relatively in a robust manner;

the presence of a large informal sector that comprises of domestictrade and commerce which creates some inbuilt resilience in theeconomy; the positive impact of the plunge in commodity prices, particularly oiland fertiliser, on costs of production;Policy initiatives in 2004 further fuelled the liquidity bubble. In the USA, low-incomeearners were encouraged to buy homes with little or no equity and the banks moved toproviding low-income mortgages. Investment banks benefited from less stringent rules thatpermitted them to increase their leverage ratios. Changes in international bank regulations


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opened opportunities for banks to accelerate their off-balance sheet activities.In many countries, this credit bubble translated into higher real estate prices andabnormally strong returns in equity markets. It also fuelled growth in non-traditionalfinancial products, such as financial derivatives and complex structured products. Thecomplexity of these products made assessing risk and providing oversight more and moredifficult, outstripping the ability of regulators and credit rating agencies to keep pace with

developments. The traditional regulatory framework was structured to addressconventional retail banking, not the new providers of credit: investment banks, hedge funds,pension funds and other non-retail bank entities.As with all financial bubbles, it was only a matter of time before events triggered acorrection. That occurred when a rebalancing of monetary policy led to tighter creditconditions in late 2005 and early 2006. As a result, U.S. house prices peaked in 2006 andU.K. prices shortly after. However, it was only in mid 2007 that the true financialconsequences began to be recognised. The resulting financial losses significantly impairedthe balance sheets of many financial institutions, as assets were marked down but liabilitiesremained unchanged. This led to a shift in cash hoarding and the unwillingness to lendbetween financial firms. The combination of these developments caused credit to becomeless available and more costly. The value of stocks fell dramatically around the world,

household wealth declined and in many industrialised countries and many advancedeconomies fell into recession.Central banks and governments responded aggressively by lowering interest rates,providing assistance to financial institutions, increasing public expenditures and reducingtaxes. These policy actions should eventually restore stability to the financial system andspur economic growth.

the minimal exposure of Bangladesh to international capital marketsmaking the economy less vulnerable to the withdrawal of foreigncapital; the strong macroeconomic fundamentals underwritten by sustainablelevels of budget deficit and public debt;

many garment orders are shifting from China to other countries(Vietnam, Cambodia) including Bangladesh; relatively low retrenchment of Bangladeshi workers in the Gulf andMiddle Eastern countries because Bangladeshi workers are engagedmainly in unskilled low paid jobs, not affected by the recession.1.8 However, there still remain significant risks. Without some recovery inthe price of oil, the oil exporting countries in the Gulf could face a sustaineddownturn that would lower demand for migrant workers and limit growth inremittance inflows into Bangladesh. A slow recovery and budget cut-backs inadvanced economies could also impact aid flows to Bangladesh. It is against

this background that the medium-term macroeconomic framework has beendeveloped (details in Chapter 2).This forecasts a growth rate of 5.9 percentfor FY09, 5.5 percent for FY10, 6.0 percent for FY11 and 6.5 percent for FY12.


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Bangladeshs Progress towards Achieving the MillenniumDevelopment Goals (MDGs)1.12 Bangladesh has made remarkable progress towards achieving povertyreduction and realising its MDGs (Table 1.1). In 1992 per capita GDP wasUSD 277.0 since then it has increased reaching USD 487.0 by 2007. Thenational head count rate of poverty measured by the upper poverty linedeclined from 58.8 percent in 1991 to 48.9 percent in 2000 and further to 40percent in 2005. However, large variations continue to persist in the incidenceof poverty in rural and urban areas with levels of poverty falling faster in therural areas. It should be noted, however, that the impact of growth on povertyreduction has been neutralised to some extent by an increasing inequality of income in the country the Gini coefficient increased from 0.39 in 1991 to0.47 in 2005 implying an average annual increase of 1.47 percent during theperiod. Notwithstanding the progress in poverty reduction there is little roomfor complacency.1.13 In terms of human development net enrolment in primary education

increased from 60.5 percent in 1990 to 91.1 percent in 2007. Gender parity inprimary and secondary education has been achieved. Infant mortality hasbeen halved from 94 per 1,000 live births in 1990 to 40 per 1,000 live births in2007. The human development index in 1995 was 452 which has increased to548 in 2005.1.14 The average life expectancy at birth has increased from 56.1 years to65.4 years (64.4 for male and 66.0 for female). It is estimated that over 74percent of the population have access to safe drinking water supplies andabout 40 percent of the population have access to an improved sanitationsystem. Infrastructural development of the rural roads has diminished thecurse of remoteness for the majority of villages. Bangladesh has earned thedistinction of achieving a major decline in population growth rate and of graduating to the medium human development group of countries in theUNDPs ranking .

Medium-Term Development Priorities1.15 The new democratic Government has adopted its strategy entitledVision 2021 to guide the setting of its development priorities. This envisagesthat by 2021, which is the golden jubilee of Independence, Bangladesh willhave achieved social justice, environmental protection, human rights andequal opportunities for its citizens. In progressing towards these goals thegovernment has identified five priorities that will guide the development of itspolicies and programmes:

Sustaining economic development in the face of the global financialand economic crisis. This will be achieved through theimplementation of the short-term and medium-term policy responsesoutlined above (1.9-1.11), which aim to(i) Mitigate the impact of the global crisis;(ii) Ensure that Bangladesh is best placed to benefit from thesubsequent global recovery;(iii) Emphasise the diversification of output and exports.


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Enhancing domestic demand. This will mainly require(i) Increased investment and consumption (as a result of which government has already reduced interest rates);(ii) Creation of jobs in the domestic economy;(iii) Ensuring income transfer measures and subsidies for thepoor; and(iv) Keeping prices of goods lower by curtailing varioussyndicates and their collusion and improving the mobilityof goods from one area to another. Undertaking effective action against corruption. This will be achievedthrough:(i) Implementing measures to eliminate bribery, extortion,undeclared income, loan defaulters, rent-seeking,procurement manipulation, black money and other corrupt practices;(ii) Breaking-up of state and private monopolies;(iii) Preparing a citizens charter for each government

department for setting out the standards of service andconduct against which it will be held to account;(iv) Right to information Act has already been introduced toenhance transparency and accountability of thegovernment(v) Computerising the government business processes. Ensuring adequate power and energy supplies. This will require:(i) Implementing a three year programme of urgentmeasures to address the existing severe energyshortages involving expansion of power generatingcapacities, and critical investments in transmission anddistribution networks;(ii) Exploring and exploiting new oil, gas and coal fields;(iii) Developing a long-term policy framework for the energysector to ensure that systems capacities are in futurematched to the growth in energy demand. Eliminating poverty and inequality. This will be achieved through:(i) The creation of sufficient opportunities in agriculture andbringing greater vibrancy to the rural economy andstrengthening the social safety net provision for the ultrapoor;(ii) Undertaking policy and programmes to expandemployment opportunities, particularly in the rural areas;

(iii) Reviewing in detail the National Strategy for AcceleratedPoverty Reduction and producing a revised version tospeed up progress towards achieving poverty reductionand realising the MDGs.

Establishing good governance. Measures will be taken to:(i) Address more effectively the twin threats of terrorism andreligious extremism;


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(ii) Ensure genuine independence and impartiality of the judiciary;(iii) Guarantee respect for human rights;(iv) Continue the on-going reform of the electoral systems;(v) Reform the public administration to ensure that is freefrom politicisation and pro-people;(vi) Modernise the law and order agencies and ensure thatthey remain above political influence.1.16 Central to these priorities is the Governments renewal of the twincommitments to reduce poverty and promote gender equity. Reflecting thiscommitment, it has set more challenging targets for reducing the incidence of poverty to 25 percent and extreme poverty to 15 percent by 2013.Box 1.3Expenditure on Social Safety Net, Poverty Reduction and WomensAdvancementThe Government of Bangladesh is committed to continue to develop and provide varioussocial protection policies and programmes and to undertake pro-poor and pro-womenadvancement and female rights activities. These activities are designed to help the poor and vulnerable groups cope with various adverse economic, social and natural shocksand realities. They include income increasing activities, micro-credit for the poor at a lowinterest rate, a one house and one farm programme to encourage a return back to thevillage, employment generation programme for the ultra-poor, the provision of healthservice at the door steps, a nutrition programme for poor women and children, theimplementation of a stipend programme to encourage girls education, the strengtheningof disaster prevention activities and programmes to reduce the threat of violence againstthe poor, especially women.An estimate indicates (see table below) how much of total programme expenditure isspent and allocated for social safety net, poverty reduction and womens advancementand rights.Share of different expenditure categories (in percent)Total P Expenditure categories rogramme Expenditure FY08 Revised FY09 Revised FY10 BudgetSocial safety netprogrammes16.5 17.4 18.1Poverty reduction 70.8 70.5 71.4Womens advancement andrights31.8 35.1 35.4Source: RCGP database, Finance Division, Ministry of Finance1.17 The present government is highly committed to addressing the issue of the widespread prevalence of gender based disparity and discrimination. Thegovernment takes a two pronged approach to addressing gender baseddisparity and discrimination issues. It undertakes specific activities which aretargeted solely to women and girls such as the female stipend programme;the nutrition programme for poor lactating mothers; and the voucher programme for poor pregnant women etc. On the other hand womensadvancement issues are also mainstreamed in the regular activities of variousministries where women (and girls) are specifically targeted as a predefinedproportion of beneficiaries under projects and programmes containingtargeted activities which have included by design.Public Finance Management1.18 Prudent management of the public finances will be critical to therealisation of the Governments strategy and programme. Fiscal policies will


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be geared to ensuring the sustainability of public finances over the mediumterm,while allowing flexibility to introduce specific initiatives to address someof the immediate consequences of the global slowdown. Particular attentionwill be given to introducing measures to enforce the collection of governmentrevenues, and to improve the allocation of public resources and the efficiencyof their use. The key elements of the Governments revenue strategy are(i) Continue the on-going reforms and revenue enhancing measures;(ii) Shorten the VAT exemption list of domestic products and imports;(iii) Expand the VAT and income tax net;(iv) Introduce a unified Taxpayer Identification Number (TIN) for incometax and VAT;(v) Further modernise and rationalise the taxation system;(vi) Separate institutional responsibility for tax policy formulation and taxadministration;(vii) Decentralise tax collection operations; and(viii) Implement a zero tolerance policy for tax evaders1.19 In the ongoing reforms public expenditure is given due priority. The

government will accelerate the implementation of its Strategic Vision for Public Finance Management (PFM) backed up by an expanded programme of support from its Development Partners. The main components of a PFMsystem are: a medium term budgeting framework, supported by service plans,annual budget preparation and implementation12 effective systems of accounting including reporting of deliverablesagainst the budget, and internal control arrangements and externalauditing1.20 The on going cycle of PFM reform has concentrated on building systemsand institutional capacity in all of these areas. In particular the Medium TermBudgetary Framework forms an important bridge between the national policyframework and the operational plans of the line Ministries.

1.21 Under the ongoing financial reforms in FY09 16 ministries/divisions werebrought under the MTBF process. In the FY10, 4 more ministries/divisionshave been brought under the MTBF process. On principle it has been decidedthat all ministries/divisions will be brought within this process within the nextthree years. Towards that objective 12 more ministries have been introducedto MTBF in a partial manner in the FY10. These 12 ministries/divisions will bebrought under the full MTBF process during the FY10-11. In the meantime thegovernment has introduced an Integrated Budgeting and Accounting System

(Box 1.4) with the aim of improving budgeting and accounting.1.22 The recently announced switch back to a Five Year Plan in place of theNSAPR from 2011 creates an opportunity to further strengthen the linkagesbetween the national policy framework and the budgeting system, to improvethe monitoring and evaluation framework and also to strengthen the projectappraisal methodology.


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Low production By hiding costs through the use of employee stock options for compensation(an issue of current debate in US corporate governance), a local in the importing country can use

the high valuation of his stock, driven by creative accounting and artificially low production costsand interest rates at the exporter country, to raise funds to further subsidize the production costsof the final product, be it software or hardware. The content of the product will increasingly comefrom low wage, low margin exporting nations, and the out-sourcing assembler's manufacturinginvolvement may be little beyond snapping out-sourced parts in place, advertised ad nauseum asa US brand. Dell is a classic example, as is Disney's licensing empire

Unemployment problem The main downside risk to the outlook is that the confidenceand wealth effects of the financial crisis are much more persistent than in the baseline, and that theconsolidation efforts of banks constrain lending more durably.In this scenario, second-round effects intensifyincluding rising unemployment and thebankruptcy of firms that might have survived a milder recession and unemployment.

Inflation rate the Latin American economies are in far better shape today than theywere in the early 1980s in terms of sustainability of external debt. They have built uplarge external reserves and kept their debt moderate relative to GDP (figure 4). As aresult, their ratios of net external debt(gross debt minus reserves) to GDP are typically inthe range of 10 to 20 percent now, in contrast with about 50 percent or higher in the early1980s. It seems unlikely that the second-worst global recession since the depression willtrigger a Latin American debt crisis similar to the first one. A major reason is that thistime international interest rates are low, whereas in the early 1980s there was the Volcker shock to international interest rates, monetary tightening made necessary by the worst

postwar global inflation. The burden of debt depends on both the amount of debt and its

price, the interest rate. Imports On the other hand Bangladesh also faces some opportunities as a result

of the decline in prices of many import items, particularly of crude oil, fertilizer,and food items etc. Moreover, Bangladesh has not experienced anycatastrophic natural disaster since the major cyclone Sidr in November 2007. The most recent cyclone Aila, which took place in May 2009, some

damage took place in some areas of the country and therefore is not expectedto have any severe impact on the economy.

Exports Bangladesh was initially coping well with the ongoing global financialmeltdown. In the last few months, however, the effects of this crisis have begun to befelt inBangladesh, with exporters facing more difficult and competitive marketconditions. The growth in remittances from Bangladeshi expatriate workers isbeginning to falter as employers in the Gulf region reduce their workforce andthe business outlook and labor markets in the USA and Europe deterioratessharply. Currently there are indication that the growth rate of Bangladeshsexports will also going to face a slow down. Thus Bangladesh now has to takesteps to deal with the national challenges resulting from the global economicrecession.

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