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Map of Asia |
CIAO DATE: 2/00
Bangledesh: A More Prosperous Future?
The South Asia Monitor
Number 2
October 1, 1998
Bangladesh, considered a basket case when it became independent in 1971, has now become a world leader in grass roots microenterprise development, and with the discovery of natural gas has found a resource that it hopes will attract international business and transform the economy. To take advantage of these assets, it will need to:
Political Situation:
The present government, headed by Prime Minister Shaikh Hasina, daughter of the country’s assassinated first leader, was elected in 1996. Her party, the center-left Awami League, has traditionally been closer to India than its rivals have been. The Awami League has adapted its economic policies reasonably well to a market orientation. Both Sheikh Hasina’s principal political rivals – the center-right Bangladesh Nationalist Party under Khalida Zia, and the Jatiyo Party under retired General Hussain Mohammed Ershad—have at one time held power.
While the last two Bangladeshi elections were considered free and fair, politics between elections is a messy business. The parliament is lively, indeed raucous, and opposition walkouts occur occasionally. Street demonstrations of increasingly massive size, rather than parliamentary processes, brought down the last two governments. Opposition agitation to the present government has followed the same pattern. Personal resentments and rivalries between political opponents run deep, and these far more than ideology have driven the political agenda. The one exception to this has been policy toward India, with the Awami League criticized for being too close to Bangladesh’s large neighbor.
Government decision-making can be idiosyncratic, and is much influenced by the senior civil service. The secretary of each ministry, the senior civil servant in place, is responsible for putting files before the minister for decision. It is normally the secretary who signs international agreements with either private parties or governments. Because of the sharp political animosities in the country, the secretaries are generally very cautious about moving forward with controversial proposals. Decision-making is therefore often fairly slow, and even forthright declarations of political level support may take a long time to implement.
Economic priorities:
Bangladesh has a predominantly agrarian economy; agriculture accounts for 30 percent of GDP, and manufacturing for just above 9 percent. Annual GDP growth in the 1990s has been in the 4–5 percent range. This is enough to increase per capita income, but growth rates of 7 percent and above are required for significant poverty alleviation. Key priorities for the economy should be to diversify the production base, and speed up the pace of structural reforms.
In 1991, Bangladesh embarked on a market-oriented reform path – it undertook fiscal and monetary stabilization, along with trade, investment and exchange liberalization, and public-sector restructuring. Some progress has been achieved on the macroeconomic front – the country’s macroeconomic situation, although fragile, is more stable than before. The government has reduced the budget deficit from 6.8 percent of GDP in 1995 to 5.3 percent in 1997–1998. But tax revenue remains low, only 11.8 percent of GDP in 1996–1997, due to weak tax administration. And inflationary pressures have been rapidly building, owing to rising food grain prices and current expenditures. Inflation rose from six percent in December 1997, to eight percent in February 1998; it is expected to average seven–eight percent over 1998–1999.
The country’s external position is vulnerable. Bangladesh is heavily reliant on concessional foreign aid and workers’ remittances to meet its external financing needs. Total aid disbursements accounted for six percent of GDP in 1995 With aid flows declining however, the country needs to attract foreign investment and earn more foreign exchange through export revenues. Foreign-exchange reserves have fallen from $3 billion in 1995 to $1.8 billion in March 1998, barely enough to cover three months of imports. The current account deficit is likely to widen slightly in 1998, from 3.1 percent of GDP in 1997, to 3.3 percent in 1998.
Bangladesh’s export base consists primarily of agricultural products and garments. The garment industry is the core of the manufacturing sector in Bangladesh and accounts for over two–thirds of export revenues. The manufacturing sector’s reliance on the garment industry is risky. Although the garment industry’s growth has been stellar, it faces a tough future, with the elimination by 2005 of all global quotas for garments, as stipulated under the terms of the Uruguay Round Trade Agreement. Over the medium-term, the country should widen its export and manufacturing base and diversify into higher value-added exports, which are less price-sensitive and afford a more stable source of export income. Strengthening the export base is particularly important in view of the limited availability of external financing. In this context, the government should establish additional export processing zones, following the success of the two current ones.
On the structural front, key areas for reform are the public sector and the power sector. Most public-sector enterprises, key among which are jute and textile mills, are loss-making. Their combined losses in 1996–97 are estimated at $360 million. Privatization has been held up by political instability and opposition from labor unions and other vested interests. Privatization has also been hampered by the poor condition of most of the enterprises on offer. Further obstacles are a weak and opaque regulatory environment, and restrictive sales methods. An area, however, where deregulation has occurred is the air industry; private carriers can now enter the domestic market, hitherto dominated by Biman, the state carrier.
The banking sector is in relatively poor condition. Non-performing loans account for over one–third of the total loan portfolio of the state banks and the domestic private banks. A urgent priority for the government is to establish a legal framework enabling lenders to recover defaulted loans from (often) politically well-connected borrowers.
Energy: Hopes and Needs
Great hopes are pinned on the new natural gas resources as the financial savior of the country. Bangladesh may be sitting on top of significant gas reserves – estimated in the range of 30–50 trillion cubic feet (TCF) – enough to meet domestic and regional energy requirements. The crucial issue for the government is to keep the entire process as transparent as possible. Although foreign investors have been welcomed, the bidding process for licensing rights to oil and gas exploration has so far not been entirely transparent. The selection process has been further delayed by the lack of government expertise in dealing with such technically complex matters. Outstanding issues – such as the number of foreign oil companies to be involved, exporting arrangements, the development of domestic gas-based industries – all need to be clarified. In particular, the government has not yet decided how to handle the issue of exporting gas. Bangladeshi political leaders fear the political fallout if the country becomes too dependent on India, the only logical market for their gas. On the other hand, the foreign exchange needed by operators to make money exploiting Bangladeshi gas will need to come from exports.
The power sector is perhaps the most crucial sector for Bangladesh’s growth. Power shortages are having a crippling effect on industrial development. The daily power shortage in the country is 450 mw, against a minimum nationwide demand of 2200 mw. Power generation units and distribution networks are old and overused. Generating plants operate at 30 percent of their efficiency levels. Weaknesses in the system are exacerbated by huge losses (arising from theft and non-payment), estimated at 33 percent. The poor supply of power is a major barrier to investment by foreign firms.
Ultimately meeting the country’s energy demands will require the construction of new generating plants and the replacement of about 30–40 percent of the present generating capacity. To date, bureaucratic delays, as well as difficulties in acquiring land, have inhibited private sector involvement in the power sector. Pressing shortages are expected to be somewhat eased by the coming on stream of gas supplies from the Sangu gas field, which will power two inactive generating plants. The government is also planning to construct four barge-mounted generating stations, but the project is mired in financial and technical complications. Critics of the scheme have pointed to its high costs, which would be significantly above those of conventional generation.
Social Challenges:
Bangladesh’s gains in the social field are impressive, particularly in population control and education. Population growth rates have fallen from 3.1 percent at independence to about 2 percent. The fertility rate has declined from over seven births per woman in 1974, to under four in 1994. Adult literacy rates have risen from 26 percent in 1974, to 38 percent. Progress on these fronts is inextricably linked to a greater participation by women in the workforce, as well as to the efforts of NGOs. The boom in the small-scale garments industry has been pivotal in pulling women into the workforce.
The record for reducing poverty is more mixed. The proportion of absolute poor has declined from 43 percent of the population in 1991–1992 to 36 percent in 1995–1996. Bangladesh, however, remains one of the poorest countries in the world, with a GNP per capita of $260, even lower than India’s $380 and Pakistan’s $480.
The Bangladeshi record in finding creative ways to bring microlending, education, and family planning to the rural villages is impressive, but the task ahead is still enormous.
Program Notes:
Upcoming events in our South Asia Briefing Series include a discussion with a delegation from Kashmir (October 7 at 9 am); a conversation with Sri Lankan Minister G.L. Peiris (October 9 at 9 am); and a discussion with Professor Varshney and Mr. S. Aiyar on the first six months of the BJP government (October 15 at 4 pm).
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