Economy of Bangladesh


Economy of Bangladesh

According to the IMF list of 2007, Bangladesh ranked as the 48th largest economy in the world. Although one of the world's poorest and most densely populated countries, Bangladesh has made major strides to meet the food needs of its increasing population, through increased domestic production augmented by imports. [http://www.state.gov/r/pa/ei/bgn/3452.htm "Background Note: Bangladesh"] . Bureau of South and Central Asian Affairs (March 2008). Accessed June 11, 2008. "This article incorporates text from this source, which is in the public domain."] The land is devoted mainly to rice and jute cultivation, although wheat production has increased in recent years; the country is largely self-sufficient in rice production. Nonetheless, an estimated 10% to 15% of the population faces serious nutritional risk. Bangladesh's predominantly agricultural economy depends heavily on an erratic monsoonal cycle, with periodic flooding and drought. Although improving, infrastructure to support transportation, communications, and power supply is poorly developed. Bangladesh is limited in its reserves of coal and oil, and its industrial base is weak. The country's main endowments include its vast human resource base, rich agricultural land, relatively abundant water, and substantial reserves of natural gas.

Since independence in 1971, Bangladesh has received more than $30 billion in grant aid and loan commitments from foreign donors, about $15 billion of which has been disbursed. Major donors include the World Bank, the Asian Development Bank, the UN Development Program, the United States, Japan, Saudi Arabia, and west European countries. Bangladesh historically has run a large trade deficit, financed largely through aid receipts and remittances from workers overseas. Foreign reserves dropped markedly in 2001 but stabilized in the $3 to $4 billion range (or about 3 months' import cover). In January 2007, reserves stood at $3.74 billion, and they increased to $5.39 billion by January 2008, according to the Bank of Bangladesh, the central bank.

Economic history

East Bengal--the region that was to become East Pakistan and later Bangladesh -- was a prosperous region of South Asia until modern times.Lawrence B. Lesser. "Historical Perspective". [http://lcweb2.loc.gov/frd/cs/bdtoc.html "A Country Study: Bangladesh"] (James Heitzman and Robert Worden, editors). Library of Congress Federal Research Division (September 1988). "This article incorporates text from this source, which is in the public domain." [http://lcweb2.loc.gov/frd/cs/about.html] ] It had the advantages of a mild, almost tropical climate, fertile soil, ample water, and an abundance of fish, wildlife, and fruit. The standard of living compared favorably with other parts of South Asia. As early as the thirteenth century, the region was developing as an agrarian economy. It was not entirely without commercial centers, and Dhaka in particular grew into an important entrepôt during the Mughal Empire. The British, however, on their arrival in the early seventeenth century, chose to develop Calcutta as their commercial and administrative center in South Asia. The development of East Bengal was thereafter limited to agriculture. The colonial infrastructure of the eighteenth and nineteenth centuries reinforced East Bengal's function as the primary producer--chiefly of rice and jute--for processors and traders in Calcutta and beyond.

Some of the same factors that had made East Bengal a prosperous region became disadvantages during the nineteenth and twentieth centuries. As life expectancy increased, the limitations of land and the annual floods increasingly became constraints on economic growth. Traditional agricultural methods became obstacles to the modernization of agriculture. Geography severely limited the development and maintenance of a modern transportation and communications system.

The partition of British India and the emergence of India and Pakistan in 1947 severely disrupted the former colonial economic system that had preserved East Bengal (now Bangladesh) as a producer of jute and rice for the urban industrial economy around Calcutta. East Pakistan had to build a new industrial base and modernize agriculture in the midst of a population explosion. The united government of Pakistan expanded the cultivated area and some irrigation facilities, but the rural population generally became poorer between 1947 and 1971 because improvements did not keep pace with rural population increase. Pakistan's five-year plans opted for a development strategy based on industrialization, but the major share of the development budget went to West Pakistan, that is, contemporary Pakistan. The lack of natural resources meant that East Pakistan was heavily dependent on imports, creating a balance of payments problem. Without a substantial industrialization program or adequate agrarian expansion, the economy of East Pakistan steadily declined. Blame was placed by various observers, but especially those in East Pakistan, on the West Pakistani leaders who not only dominated the government but also most of the fledgling industries in East Pakistan.

Following the violent events of 1971 during the fight for independence, the highest rural population density in the entire world, an annual population growth rate between 2.5 and 3 percent, chronic malnutrition for perhaps the majority of the people, and the dislocation of between 8 and 10 million people who had fled to India and returned to independent Bangladesh by 1972.Lawrence B. Lesser. "Economic Reconstruction after Independence". [http://lcweb2.loc.gov/frd/cs/bdtoc.html "A Country Study: Bangladesh"] (James Heitzman and Robert Worden, editors). Library of Congress Federal Research Division (September 1988). "This article incorporates text from this source, which is in the public domain." [http://lcweb2.loc.gov/frd/cs/about.html] ] The new nation had few experienced entrepreneurs, managers, administrators, engineers, or technicians. There were critical shortages of essential food grains and other staples because of wartime disruptions. External markets for jute had been lost because of the instability of supply and the increasing popularity of synthetic substitutes. Foreign exchange resources were minuscule, and the banking and monetary system was unreliable. Although Bangladesh had a large work force, the vast reserves of undertrained and underpaid workers were largely illiterate, unskilled, and underemployed. Commercially exploitable industrial resources, except for natural gas, were lacking. Inflation, especially for essential consumer goods, ran between 300 and 400 percent. The war of independence had crippled the transportation system. Hundreds of road and railroad bridges had been destroyed or damaged, and rolling stock was inadequate and in poor repair. The new country was still recovering from a severe cyclone that hit the area in 1970 and cause 250,000 deaths. India, by no means a wealthy country and without a tradition of giving aid to other nations, came forward immediately with massive economic assistance in the first months after the fighting ended. Between December 1971 and January 1972, India committed US$232 million in aid to Bangladesh, almost all of it for immediate disbursement.

Bangladeshi leaders slowly began to turn their attention to developing new industrial capacity and rehabilitating its economy. The static economic model adopted by these early leaders, however--including the nationalization of much of the industrial sector--resulted in inefficiency and economic stagnation. Beginning in late 1975, the government gradually gave greater scope to private sector participation in the economy, a pattern that has continued. A few state-owned enterprises have been privatized, but many, including major portions of the banking and jute sectors, remain under government control. Population growth, inefficiency in the public sector, resistance to developing the country's richest natural resources, and limited capital have all continued to restrict economic growth.

In the mid-1980s, there were encouraging, if halting, signs of progress. Economic policies aimed at encouraging private enterprise and investment, denationalizing public industries, reinstating budgetary discipline, and liberalizing the import regime were accelerated. From 1991 to 1993, the government successfully followed an enhanced structural adjustment facility (ESAF) with the International Monetary Fund (IMF) but failed to follow through on reforms in large part because of preoccupation with the government's domestic political troubles. In the late 1990s the government's economic policies became more entrenched, and some of the early gains were lost, which was highlighted by a precipitous drop in foreign direct investment in 2000 and 2001. In June 2003 the IMF approved 3-year, $490-million plan as part of the Poverty Reduction and Growth Facility (PRGF) for Bangladesh that aimed to support the government's economic reform program up to 2006. Seventy million dollars was made available immediately. In the same vein the World Bank approved $536 million in interest-free loans.

This is a chart of trend of gross domestic product of Bangladesh at market prices [http://www.imf.org/external/pubs/ft/weo/2006/01/data/dbcselm.cfm?G=2001 estimated] by the International Monetary Fund with figures in millions of Bangladeshi Taka.

For purchasing power parity comparisons, the US Dollar is exchanged at 12.86 Takas only. Average wages in 2007 hover around $2-3 per day.

Economic outlook

Efforts to achieve Bangladesh's macroeconomic goals have been problematic. The privatization of public sector industries has proceeded at a slow pace--due in part to worker unrest in affected industries--although on June 30, 2002, the government took a bold step as it closed down the Adamjee Jute Mill, the country's largest and most costly state-owned enterprise. The government also has proven unable to resist demands for wage hikes in government-owned industries. Access to capital is impeded. State-owned banks, which control about three-fourths of deposits and loans, carry classified loan burdens of about 50%.

The IMF and World Bank predict GDP growth over the next 5 years will be about 6.0%, well short of the 8%-9% needed to lift Bangladesh out of its severe poverty. The initial impact of the end of quotas under the Multi-Fiber Arrangement has been positive for Bangladesh, with continuing investment in the ready-made garment sector, which has experienced annual export growth of around 20%. Downward price pressure means Bangladesh must continue to cut final delivered costs if it is to remain competitive in the world market. Foreign investors in a broad range of sectors are increasingly frustrated with the politics of confrontation, the level of corruption, and the slow pace of reform. While investors view favorably recent steps by the interim government to address corruption, governance, and infrastructure issues, most believe it is too early to assess the long-term impact of these developments.

Economic sectors

Agriculture

Most Bangladeshis earn their living from agriculture. Although rice and jute are the primary crops, maize and vegetables are assuming greater importance. Due to the expansion of irrigation networks, some wheat producers have switched to cultivation of maize which is used mostly as poultry feed. Tea is grown in the northeast. Because of Bangladesh's fertile soil and normally ample water supply, rice can be grown and harvested three times a year in many areas. Due to a number of factors, Bangladesh's labor-intensive agriculture has achieved steady increases in food grain production despite the often unfavorable weather conditions. These include better flood control and irrigation, a generally more efficient use of fertilizers, and the establishment of better distribution and rural credit networks. With 28.8 million metric tons produced in 2005-2006 (July-June), rice is Bangladesh's principal crop. By comparison, wheat output in 2005-2006 was 9 million metric tons. Population pressure continues to place a severe burden on productive capacity, creating a food deficit, especially of wheat. Foreign assistance and commercial imports fill the gap. Underemployment remains a serious problem, and a growing concern for Bangladesh's agricultural sector will be its ability to absorb additional manpower. Finding alternative sources of employment will continue to be a daunting problem for future governments, particularly with the increasing numbers of landless peasants who already account for about half the rural labor force.

Manufacturing

Many new jobs - mostly for women - have been created by the country's dynamic private ready-made garment industry, which grew at double-digit rates through most of the 1990s. By the late 1990s, about 1.5 million people, mostly women, were employed in the garments sector. During 2001-2002, export earnings from ready-made garments reached $3,125 million, representing 52% of Bangladesh's total exports.

Eastern Bengal was known for its fine muslin and silk fabric before the British period. The dyes, yarn, and cloth were the envy of much of the premodern world. Bengali muslin, silk, and brocade were worn by the aristocracy of Asia and Europe. The introduction of machine-made textiles from England in the late eighteenth century spelled doom for the costly and time-consuming handloom process. Cotton growing died out in East Bengal, and the textile industry became dependent on imported yarn. Those who had earned their living in the textile industry were forced to rely more completely on farming. Only the smallest vestiges of a once-thriving cottage industry survived.

Investment

The stock market capitalisation of the Dhaka Stock Exchange in Bangladesh crossed $ 10 billion in November 2007.The earliest strategy of the Bangladeshi government was to promote industrialization by making funds available for businessmen through subsidies and national banks. But this plan went awry, as the government lacked the political will to stop financing poorly-performing companies. As a result, the national banks had built large heaps of 'non-performing' loans which are unlikely to be ever repaid. The failure of the national banks discouraged investments by the emerging private financial sector. Currently, Bangladeshi entrepreneurs generally suffer from lack of funding as many banks are reluctant to invest in industry and have instead turned their attention to consumer credit.

Textile sector

Bangladesh's textile industry, which includes knitwear andready-made garments along with specialised textile products, is the nation's number one export earner. The sector, which employs 2.2 million workers, accounted for 75 per cent ofBangladesh's total exports of US$10.53 billion in FY2005-06, in the process logging a record growth rate of 24.44 per cent. However, since May 2006 the industry has been plaguedby on-going industrial unrest, as textile workers, who are among some of the most lowly paid in the world, have staged regular violent demonstrations in a bid to achieve a higherminimum wage, regular rest days and safer working conditions.

Following the worst of the unrest in late May, which saw at least one worker killed as police shot live rounds at protesters, the government formed a Wage Commission, orderingit to report on a suitable new minimum wage in three months. [ [http://news.bbc.co.uk/1/hi/world/south_asia/5007252.stm "One dead after Bangladesh protest"] BBC May 23, 2006]

The Commission, which included business and worker representatives finally released its conclusions on October 9, recommending the wage be set at Tk1,662.50, up from the currentlevel of Tk950, but far below initial worker demands for Tk3,000.

Whether this new wage will placate workers, who allege years of unsafe and abusive conditions remains to be seen. Fresh outbreaks of violence occurred on Oct 2, 3 and 10, but at least some of these protests appear to have stemmed from factory-specific factors, rather than industry wide discontent.

After initially condemning the unrest as the work of outsiders attempting to capture the nation's share of global markets, Bangladesh Garment Manufacturers and ExportersAssociation (BGMEA) leaders appear to have finally accepted the need to raise wages.

The government also seems to believe some change is necessary. On September 21, 2006 then Ex-PrimeMinister Khaleda Zia called on textile firms to ensure the safety of workers by complying with international labor law at a speech inaugurating the Bangladesh Apparel & TextileExposition (BATEXPO).

External trade

The Bangladesh Garments Manufacturers and Exporters Association (BGMEA) has predicted textile exports will rise from US$7.90 billion earned in 2005-06 to US$15billion by 2011. In part this optimism stems from how well the sector has fared since the end of textile and clothing quotas, under the Multifibre Agreement, in early 2005.

According to a United Nations Development Programme report "Sewing Thoughts: How to Realise Human Development Gains in the Post-Quota World" Bangladesh has been able to offset a declinein European sales by cultivating new markets in the United States. [ [http://www.undprcc.lk/Publications/Publications/TC_Tracking_Report_April_2006.pdf "Sewing Thoughts: How to Realise Human Development Gains in the Post-Quota World"] , "United Nation Development Programme". April 2006.]

"Last year we had tremendous growth. The quota-free textile regime has proved to be a big boost for our factories," said BGMEA president S.M. Fazlul Hoque told reporters, after thesector's 24 per cent growth rate was revealed. [ [http://www.dawn.com/2006/09/03/ebr12.htm "BD eyes $15bn textile exports by 2011"] . "The Dawn". 2006-09-03.]

Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA) president Md Fazlul Hoque has also struck an optimistic tone. In an interview with United News Bangladesh he lauded the blistering growth rate, saying "The quality of our products and its competitiveness in terms of prices helped the sector achieve such... tremendous success."

Knitwear posted the strongest growth of all textile products in 2005-06, surging 35.38 per cent to US$2.82 billion. On the downside however, the sector's strong growth came amid sharp falls in prices for textile products on the world market, with growth subsequently dependent upon large increases in volume.

Bangladesh's quest to boost the quantity of textile trade was also helped by US and EU caps on Chinese textiles. The US cap restricts growth in imports of Chinese textiles to 12.5 per cent next year and between 15 and 16 per cent in 2008. The EU deal similarly manages import growth until 2008.

Bangladesh may continue to benefit from these restrictions over the next two years, however a climate of falling global textile prices forces wage rates the centre of the nation's efforts to increase market share.

Prior to the Wage Board's announcement of its recommended minimum wage, the rate had remained unchanged at Tk950 for more than 12 years. Although the government may allow up to three years for the new wage to be implemented, and inevitably there will be compliance issues as manufacturers drag their feet, it seems politically untenable for wages to remain at their current levels given the unprecedented industrial unrest.

In response to the Wage Board's initial draft recommendation of a minimum wage of Tk1,604 to be increased to Tk1,800 after eight months, the BGMEA declared over 50 per cent of factories would be ruined within three months. While this claim is no doubt an exaggeration, the capacity of Bangladesh's textile industry to absorb a significant wage hike as margins become tighter is a key question which hangs over the future of the industry. Bangladesh's textile sector is concentrated in export processing zones in Dhaka and Chittagong. These zones, which are administered by the Bangladesh Export Processing Zone Authority, aim to offer "a congenial investment climate, free from cumbersome procedures"m according to Bangladesh Export Promotion Bureau's website. [http://www.epb.gov.bd/bangladesh_epz.html "Bangladesh Export Promotion Bureau"] . "Bangladesh Export Promotion Bureau".]

They offer a range of incentives to potential investors including 10 year tax holidays, duty free import of capital goods, raw materials and building materials, exemptions on income tax on salaries paid to foreign nationals for three years and dividend tax exemptions for the period of the tax holiday.

All goods produced in the zones are able to be exported duty free, in addition to which Bangladesh benefits from the Generalised System of Preferences in US, European and Japanese markets and is also endowed with Most Favoured Nation status from the United States.

Furthermore, Bangladesh imposes no ceiling on investment in the EPZs and allows full repatriation of profits.

The formation of labour unions within the EPZs is prohibited as are strikes.

Bangladesh's exports to the U.S. surpassed $1.9 billion in 1999. Bangladesh also exports significant amounts of garments and knitwear to the EU market.

Bangladesh also has significant jute, leather, shrimp, pharmaceutical, and ceramics industries.

Bangladesh has been a world leader in its efforts to end the use of child labor in garment factories. On July 4, 1995, the Bangladesh Garment Manufacturers Export Association, International Labour Organization, and UNICEF signed a memorandum of understanding on the elimination of child labor in the garment sector. Implementation of this pioneering agreement began in fall 1995, and by the end of 1999, child labor in the garment trade virtually had been eliminated. The labor-intensive process of shipbreaking for scrap has developed to the point where it now meets most of Bangladesh's domestic steel needs. Other industries include sugar, tea, leather goods, newsprint, pharmaceutical, and fertilizer production.

The Bangladesh government continues to court foreign investment, something it has done fairly successfully in private power generation and gas exploration and production, as well as in other sectors such as cellular telephony, textiles, and pharmaceuticals. In 1989, the same year it signed a bilateral investment treaty with the United States, it established a Board of Investment to simplify approval and start-up procedures for foreign investors, although in practice the board has done little to increase investment. The government created the Bangladesh Export Processing Zone Authority to manage the various export processing zones. The agency currently manages EPZs in Adamjee, Chittagong, Comilla, Dhaka, Ishwardi, Karnaphuli, Mongla, and Uttara. An EPZ has also been proposed for Sylhet. [ [http://www.bssnews.net/index.php?genID=BSS-08-2002-10-29&id=7] .dl|date=April 2008 "Bangladesh Sangbad Sangstha (National News Agency of Bangladesh)".] The government has given the private sector permission to build and operate competing EPZs-initial construction on a Korean EPZ started in 1999. In June 1999, the AFL-CIO petitioned the U.S. Government to deny Bangladesh access to U.S. markets under the Generalized System of Preferences (GSP), citing the country's failure to meet promises made in 1992 to allow freedom of association in EPZs.

Sylhet is fast becoming the retail capital of Bangladesh,Fact|date=February 2007 with many shopping centres being built by expatriates to serve fellow expatriates visiting Sylhet and the emerging middleclass. Many of these developments hark back to Britain. [Gillan, Audrey. [http://www.guardian.co.uk/religion/Story/0,,741056,00.html From Bangladesh to Brick Lane] . "The Guardian". 2002-06-21.]

Overview



Bangladesh has made significant strides in her economic sector since her independence in 1971. Although the economy has improved vastly in the 1990s, Bangladesh still suffers in the area of foreign trade in South Asian region. Despite major impediments to growth like the inefficiency of state-owned enterprises, a rapidly growing labor force that cannot be absorbed by agriculture, inadequate power supplies, and slow implementation of economic reforms, Bangladesh has made some headway improving the climate for foreign investors and liberalizing the capital markets; for example, it has negotiated with foreign firms for oil and gas exploration, better countrywide distribution of cooking gas, and the construction of natural gas pipelines and power stations. Progress on other economic reforms has been halting because of opposition from the bureaucracy, public sector unions, and other vested interest groups. The especially severe floods of 1998 increased the country's reliance on large-scale international aid. So far the East Asian financial crisis has not had major impact on the economy. World Bank predicted economic growth of 6.5% for current year. Foreign aid has seen a decline of 10% over the last few months but economists see this as a good sign for self-reliance.There has been 18% growth in exports over the last 9 months and remittance inflow has increased at a remarkable 25% rate. Export was $10.5 billion in fiscal year 2005 exceeding the target export of $10.4 billion. Target export for current year is $11.5 billion. An estimated GDP growth of 6.7% was predicted for FY 2006. Fact|date=February 2007

Debt - external:$16.5 billion (1998)

Economic aid - recipient:$1.475 billion (FY96/97)

Currency:1 taka (Tk) = 100 poisha

Exchange rates:taka (Tk) per US$1 - 69.000 (October 2006), 49.085 (1999), 46.906 (1998), 43.892 (1997), 41.794 (1996), 40.278 (1995)

Fiscal year:
1 July - 30 June

References

*factbook
*StateDept

External links

* [http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/0,,contentMDK:21160796~pagePK:146736~piPK:146830~theSitePK:223547,00.html Global Economic Prospects: Growth Prospects for South Asia] The World Bank, Dec. 13, 2006
* [http://web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/0,,contentMDK:21421907~pagePK:146736~piPK:146830~theSitePK:223547,00.html Bangladesh: Strategy for Sustained Growth] , The World Bank, 2007-07-27
* [http://www.bangladeshbudget2007.info/ Bangladesh Budget 2007 - 2008]

ee also

*Bangladesh
*Bangladesh Academy for Rural Development


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