You are on page 1of 37

Gross Domestic Product (GDP

Gross Domestic Product has a very precise definition that allows you to tell whether or not a transaction is part of GDP. It is very important that you learn this exact definition. GDP is the total market value of all the final goods and services produced within an economy in a given year. We know, GDP = C + I + G + NX Introduction Bangladesh, small state of South-East Asia with the total area of 144,000 sq km, can‘t still shake off the ill-reputation of being one of the least developed countries, shadowed by miserable poverty, high illiteracy rate and a gigantic population of 141, 340,476 (July 2004 est.) Moreover natural disasters such as seasonal inundation, cyclones, draughts etc. constantly pursue its lot every year, which break the backbone of the economy and frustrate future planning. Economy is sick with high inflation rate. The GDP, chief indicator of an economy, shows that for a long time, Bangladesh economy was backward. The years after independence, the size of Real GDP, Per Capita GDP and their growth rates was small. The condition improved from 1990. Yet, still the growth trend and the structural changes of GDP in Bangladesh are not satisfactory. Many problems are responsible for this unsatisfactory GDP. These are the shortage of domestic food production, narrow structure of exports, increasing growth rate of imports, failure in the invocation of much Foreign Direct Investment (FDI), a defective banking system with cumulative interest of loans, continuous loss in the public enterprises, poor infrastructure, inefficient taxation, high inflation rate, political instability and the serious deterioration of law and order situation. If these problems are solved, dynamic changes will come in the percentages of GDP. The two common terms are used in this study ― Growth and GDP. Growth Growth means ‗something grown and growing‘. It is ‗a process of becoming larger or longer or more numerous or more important.‘ The word ‗growth‘ has some synonyms, such as, development, growing, increase, increment, etc. Economic growth means the economic development of a country, measurable by any indicator like GDP, prevailed in an economy, and commonly expressed in statistical and mathematical numbers.

There are two common and popular measures for the estimate of economic growth rate, as Gross Domestic Product (GDP) and Gross National Product (GNP). ‗The growth of Gross Domestic Product is usually a good indication of economic growth‘. GDP GDP is the abbreviation of the economic term ‗Gross Domestic Product.‘ ‗GDP is defined as the total value of all goods and services produced within that territory during a specified period (most commonly, per year).‘ Another definition is that ‗the GDP is the market value of all the goods and services produced by labor and property located in the region, usually a country.‘ GDP can be estimated by two following ways--GDP= consumption + investment + government expenditures + exports - imports GDP=GNP—‗The net inflow of labor and property incomes from abroad.‘ There are two types-----Nominal GDP and Real GDP. Nominal GDP, also called ‗money GDP‘, is calculated on the basis of the current price or today‘s price, by which comparison between GDPs of different years may be incorrect because of the impact of inflation. Real GDP, also called ‗Constant Price GDP‘, is estimated ‗by converting current information into‘ a standard price of a specific year or years, for example, 1985 takas, which can be more reliable than the first one and is more acceptable to the economists. A brief discussion of Bangladesh economy may help us to understand its GDP. Economy of Bangladesh is composed of three main sectors-----Agriculture, Industry and Service. Agriculture Agriculture sector includes crops, forestry, livestock and fisheries. Main agricultural food products are cereals, pulses, sugur/sugar, milk, meat, fish, fruits, vegetables, oil etc. Major Industrial crops are jute, tea, tobacco etc. Total cultivable area was 2.26 crore acres in the survey of 1983-84, which decreased to 1.64 crore acres in 1995-96. Long before and after independence war, agriculture was the dominating sector in Bangladesh economy. In the years after independence, agricultural products increased steadily; yet it couldn‘t keep pace with the rapid growth of population. Rice is the main food crop in Bangladesh. Bangladesh acquired the fourth place in the world for the production of huge rice in the middle of the 1980s, which was caused by the use of high yielding seeds, fertilizer and irrigation. Yet in the 1980s, Bangladesh had to import ‗an average of 2 million tons of food grains each year‘ to feed people. In the late 1980s, there was a progress in industrialization. But still about 50 percent of the value of GDP came from agriculture in Bangladesh. From 1990, industrial establishments

and foreign investments increased to a great degree, and agriculture was neglected, because of which its improvement was hampered and fell down sharply. Technological changes have come to agriculture greatly compared to those of the previous years. Use of fertilizer, irrigation equipment and high yielding variety (HYV) of rice has increased hopefully. Yet rice and wheat are being imported every year for the huge population. Domestic production of other agricultural products, such as, pulses, sugar, milk, meat, fish, vegetables and oil never fulfilled requirements of the country, rather remained short. Fish was being quickly depleted by the arbitrary use, which has been somewhat saved by cultivation. By 1980, forest covered only 16 percent of the total land in Bangladesh, which was also being destroyed by the unwise and unlimited use. So, its contribution to GDP went down to 1.89 percent in 1999-2000. Industry There are three categories of industries in Bangladesh ― Large Scale Industries, Medium Scale Industries and Small & Cottage Industries. Major industries are referred in the following--1. Food, Beverage and Tobacco 2. Textile, Apparel and Leather 3. Wood & Wood Products 4. Paper, Paper Product, Printing & Publications 5. Chemicals and Chemical Products 6. Non-Metallic Mineral Products 7. Basic Metal Industries 8. Fabricated Metal Products 9. Other Industries & Handicrafts In British and Pakistani colonial rule in Bangladesh, industries couldn‘t develop much. After independence, though this sector increased, it was not satisfactory. The highest growth rate of Industrial GDP was first counted as 8.1 percent in annual average in 1991-1995 at the constant prices of 1984-85. In these years, industrial establishments and foreign investments increased significantly by the help of the then government. ‗According to Planning Commission Estimates there were about 32,000 small industries and 3,83,000 cottage industries in 1990.‘

gas. chemical products.752 in 1988-89. The central bank‘s major concern is the opportunity cost of reserves build-up.2 The call has been made in the wake of the country‘s burgeoning foreign exchange (forex) reserves that amounted to a record US$8. Major imports of Bangladesh are scrap vessels.5 billion in August 2009. particularly focusing on the country‘s key macro variables including its external economy. tea. Major Exports and Imports Major exports are readymade garments. trade service. banking insurance and other professionals. Against this backdrop. For Bangladesh‘s economy. housing. Research on the different aspects of reserves accumulation is vast but little has been done in Bangladesh. rice. Furthermore. which increased in 23. Service Recently. chemicals.Hence. the aim of the paper is to provide a simple analysis of Bangladesh‘s forex reserves. It is perhaps unique in the sense that the trade balance of current account or capital flows components (including foreign direct investments [FDI]) of capital and financial accounts generally lead to a surplus in the balance of payments (BoP) which eventually end up in reserves build-up. transport & storage. raw jute and jute goods. A country has to maintain a certain amount of forex reserves to meet its import bills and other short-term payments or debt obligations. Foreign Exchange Reserve: In its latest monetary policy statement.356 in 1981-82. the Bangladesh Bank has neither given any tailed account on the optimal level of reserves nor any roadmap on how to utilise the country‘s excess reserves. utility (power. Nevertheless. inter alia.The number of manufacture industries was 3. iron and steel. public administration and defense. as can be noticed in East Asia and other emerging markets. machinery and equipment. frozen fish and seafood. the reserves accretion has both advantages and disadvantages. Such moves have faced a huge setback in recent times following the capital loss of some of the key SWFs. surplus in the BoP account and the consequent reserves build-up is a double-edged sword and poses a momentous challenge to the central bankers in moulding monetary policies. water). wheat. and its reserves position vis-à-vis some conventional reserves adequacy criteria. etc. the alternative uses of reserves are not the panacea.3 However. stated that ―the country will be better off with utilisation of the foreign exchange inflows in growth supportive investments than with accretion of ever reserves‖. But reserves accumulation in excess of optimal level comes with significant costs (both fiscal and social). this is the largest sector in the percentage contribution to GDP. fertilizer. oil products. the Bangladesh Bank. an unprecedented rise in remittances in recent years has resulted in reserves accumulation. leather etc. Its major sub-sectors are construction. sugar. if any. the central monetary authority of Bangladesh. edible oils. The paper also attempts to evaluate the usefulness of these global benchmarks .

that have direct association with reserves accumulation are analysed in Section III. whatever the intentions.8 Before we examine whether Bangladesh is in a position to use some of its forex reserves for infrastructure development or other productive purposes. Based on a back-of-the-envelope calculation. balance of payments (BoP) and exchange rate. it is essential to explore the literature on this issue. We shall explore some key issues pertaining to forex reserves. the reserves adequacy measure for Bangladesh is discussed in Section IV. we discuss the existing literature pertaining to reserves accumulation. However. free capital movement and an independent monetary policy. if any. The final section concludes the paper. These include motivations behind emerging markets and other developing countries‘ reserves accumulation. and/or for other purposes.14 However.15 The massive reserves accumulation in emerging markets indicate that countries can converge towards intermediate levels of the trilemma. many countries have achieved the intermediate level of this trilemma using forex reserves as a buffer. The question of alternative uses of the country‘s reserves. In other words. we look at the costs and benefits of reserves accumulation in the context of Bangladesh emphasising on its macroeconomic and financial sector dynamics. This is particularly important for countries that have institutional bottlenecks. Finally. the optimal level of reserves. concurrently known as the ―impossible trinity‖. The rest of the paper is organised as the local circumstances. The recent dynamics of some of Bangladesh‘s macro and financial variables. particularly when countries face a sudden stop in foreign capital flows or witness a reversal of flows. investments. particularly when the central banks target exchange rate with an excess supply of foreign exchange. the open-economy trilemma might break down under certain conditions. a critical point here is that the success of this strategy depends on how open or closed an economy is. a country cannot maintain a fixed exchange rate.13 In theory. Nevertheless. reserves shield developing economies form financial distress. A comfortable level of reserves minimises a country‘s sovereign default risk. banking on a managed float exchange rates while maintaining some degree of monetary autonomy and accelerating financial openness. Reserves Accumulation: The Literature The International Monetary Fund (IMF) defines an economy‘s international reserves as ―those external assets that are readily available to and controlled by monetary authorities for direct financing of payments imbalances through intervention in exchange markets to affect the currency exchange. In Section II.16 To sum up. In Section V. the forex reserves build-up in most circumstances is a byproduct of domestic currency undervaluation (or to resist currency appreciation) vis-à-vis its major trading partners that ultimately makes the concerned country‘s tradables relatively competitive in the international markets. The literature on the various issues under this rubric is vast and burgeoning. irrespective of precautionary or mercantilist motives. will be discussed in Section VI. a substantive stock of reserves could potentially lower the concerned country‘s . so our discussion should be seen as nothing more than a ‗helicopter tour‘. particularly the trends in its savings. the opportunity costs of reserves build-up and their alternative uses. a fundamental contribution of the Mundell-Fleming framework.

This development has led to a surplus in Bangladesh‘s current account (BoP) that eventually ends up in reserves accretion. aid flows are waning. and remittances are skyrocketing. Its exports and imports are growing steadily. This is partly due to its underdeveloped financial systems. particularly dynamics in its current account. The Bangladesh economy has demonstrated significant economic growth in the past one and a half decades. Recent Macroeconomic and Monetary Developments in Bangladesh Economy How is this conventional wisdom of optimal reserves useful for Bangladesh. whereas its current account had been volatile until 2005-06. Bangladesh falls into the latter group owing to its ‗investment drought‘. Figure 1: Savings-Investment Gap and Forex Reserves Accumulation in Bangladesh: 1997-98 to 2008-09 As seen in Figure 1 (the left scale).36 and partly due to other structural problems in the economy – entailing difficulties in properly channeling national savings to investments. the country‘s major macro variables are relatively better than compared to that of a decade ago. From the macroeconomic perspective. we need to look at some of its key macro variables that have implications for reserves build-up. Despite . owing to marked improvements in its key macro variables including steady development in its external sectors. In the case of Bangladesh. imported savings that are reflected in gross national savings (GNS) fill the gap. So. Generally. a consistent surplus in its current account is a very recent development. Figure 2: Trends in Balance of Payments of Bangladesh: 1998-2008 The BoP position of Bangladesh (see Figure 2) shows that the country ran a modest surplus in its capital and financial accounts until recently. The economy has been experiencing a steady trade deficit (both exports and imports are on the rise with import growths outpacing export growth) but the private transfer component of the current account has witnessed a steady growth largely owing to workers‘ remittances (see Table 2). this scenario is seen either as a ‗savings glut‘35 (that one observes in China) or an ‗investment drought‘ (other emerging Asian economies). It is current account surpluses that led to the huge reserves accumulation in East Asian countries. As a result. Lately. and where do its forex reserves stand vis-à-vis the reserves yardsticks we have discussed in the preceding section? Before we do a back-of-the-envelope calculation of Bangladesh‘s forex reserves. there is a substantive gap between Bangladesh‘s gross domestic savings (GDS) and gross domestic investments (GDI). the gap has been bridged historically by GNS but since 2005-06 one can see a growing divergence between GNS and GNI. As evident from the slope of GNI. Bangladesh has become one of the leading remittance recipient countries. One gets a relatively better picture of Bangladesh‘s forex reserves by assessing its BoP position. But there are some pitfalls too.borrowing costs. The right scale of Figure 1 shows the trends in its forex reserves.

Theoretically. although exports witnessed a modest growth. If the amount of international reserve of the central Bank falls below the country‘s three months‘ import bill. current account is positively correlated with fiscal balance. lower panel). Figure 3: Bangladesh’s Equilibrium Current Account (% of GDP) Despite this positive scenario. The paycheck comes in at the end of each month. private trasfers and NFA. It somewhat resembles the household‘s precautionary demand for cash balance. These two developments could slightly overstate the BoP positions of Bangladesh vis-à-vis its recent past Foregin Currency Reserves in different times in Bangladesh Introduction Either from political or economic perspective a very sensitive indicator for any government is to maintain a satisfactory level of international reserve in its coffer. Bangladesh‘s imports bills were marginally lower in 2008-09 than the previous fiscal year. remittances help maintain the overall surplus in its BoP. Table 2: Major Components of Bangladesh’s Current Accounts (in million US$) An IMF estimation on Bangladesh‘s equilibrium current account shows that the country‘s current account balance has improved markedly thanks to its economic growth and remittance inflows (private transfer). Empirical studies on Bangladesh‘s equilibrium current account balance support this analysis. Historically international reserves of Bangladesh have not been much promising. The excessive inflows of remittances could possibly be due to the repatriation of savings by overseas Bangladeshis who lost their jobs in different parts of the world during the financial crisis or their savings found limited investment opportunities in overseas capital markets. but the family‘s purchases are spaced out irregularly over the month. GDP growth. Hence it is both handy and prudent to keep some cash balance even though the requirement for cash may dwindle to nothing when the next . A country needs foreign reserves mainly for two reasons: (i) to synchronize its receipts and payments with the rest of the world. thanks partly to a bust in global commodity prices. the situation is considered as critical. and (ii) to withstand occasional speculative raid by the dealers in the foreign exchange market.Figure 3 illustrates Bangladesh‘s current account norm along with the projected medium-term current account which is based on medium-term projection values for fiscal balance. one needs to assess Bangladesh‘s current BoP balances (thus forex reserves) with some caution. On many occasions its reserve balance were not able to pay for its import bill (see figure in the appendix B. economic growth and private transfers and adversly with net foreign assets.leakages in the country‘s capital and financial accounts37 and trade account.

and analysis of the results. Obviously. Foreign aid (AID): Foreign Aid is defined as the sum of food aid. In the appendix B it is clearly seen that declining role of foreign aid has well been taken over by the heroic role of the earnings of expatriate workers. Of late wage earners‘ remittances are playing a dominant role in the foreign exchange reserve. commodity aid and project aid that was disbursed in each year. The paper is organized as follows. paying bill for obtaining health service and education abroad. Sources of data are also contained in this section. and remittances. The reserve position of a country is determined for the most part by the nature of its transaction with the rest of the world and the corresponding flow of fund into or out of the country. export earnings. So it . The WES provided incentives for sending money through official channels.paycheck arrives. The most important part of this paper is section four which contains model specification. paying for factor earnings of foreign nationals. International remittance has played a significant role in reducing dependence of the government on Foreign Aid. positive and higher values of the variable will indicate better performance. Expatriate workers could now send their money at rates corresponding approximately to the open market rate. Since liberation foreign exchange earnings were composed of mainly foreign aid. Relevant variables are defined in section three. But subsequently Bangladesh has been able to diversify its export and as a result export earnings increased significantly. These three variables have been controlled for when evaluating the performances of the three major political regimes in Bangladesh. Objectives of the study are stated in the second section. Performance Measurement (DRM): Performance in each year is measured as excess of international reserve over the period‘s average three months import bill. This reserve leaks out in the form of paying import bill. Remittances (REM): It is defined as the amount of foreign currency sent by the Bangladeshi nationals working abroad. The role of remittances got prominence in 1974 when Wage Earners Scheme (WES) was introduced. estimation. Definition of variables and Sources of Data International reserve (IR): The amount of liquid asset hold by the central Bank in terms foreign currency in order to synchronize receipt and payment with foreign country and to withstand occasional speculative activities raid by the dealers of foreign exchange. For Bangladesh like many other developing countries foreign aid and remittance inflow have been two major factors in creating reserve balance. The study uses dummy variables to represent the political regimes and on basis of estimated coefficients of these qualitative variables conclusions are arrived at about the performances of the three regimes in maintaining international reserve position. Aid in physical term for example commodity or project aid indirectly contributes toward foreign exchange reserve buildup as it reduces the need for importing these material by spending foreign currency. Section five concludes the paper with some recommendations. On this ground trade balance is an important factor for determining a country‘s reserve position. Foreign aid was the major component of reserve during the early seventies.

Bangladesh Bank (BB) is coming under pressure to arrest the decline in the value of the Bangladeshi currency. At the same time since Bangladesh has potential for exporting its huge unskilled manpower. V: Concluding Remarks A sound level of foreign exchange is an indication of a country‘s healthy foreign sector.542 billion US dollars whereas the corresponding figure for Bangladesh was only 3. Some worry that this is a reflection of a lack of confidence in the Bangladeshi economy. We have chosen political regimes as an indicator of policy environment that can affect reserve. Export earnings. foreign investments. government can take initiative through diplomatic means to persuade countries like Malaysia and Middle East where there is shortages of unskilled manpower to import more manpower from Bangladesh. In these changing circumstances it is in the developing countries‘ interest to turn their attention to finding ways of increasing their export earnings through diversification or other export promotion measures. India‘s balance of foreign exchange reserve in June 1996 was 165. Others worry that depreciation will increase the already high inflation rate. After the breakdown of the Soviet Union and other communist countries. Especially when a government is keen to keep its currency stable and avoid fluctuating exchange rates there is no alternative to maintain an adequate amount of foreign exchange reserve. the fall in the value of the Bangladeshi currency at a time when the dollar is weakening against the major global currencies and many other Asian currencies are appreciating against the dollar is viewed with a great deal of concern. In the presence of huge amount foreign exchange reserve speculators feel shy to attack a currency and devalue it forcefully. The Falling Bangladeshi Currency: There is a lot of talk these days about the falling value of the Bangladesh taka in terms of the US dollar. While the debate is understandable. between June 2010 and mid-July 2011. For example. For example. and remittances play important role in building foreign exchange reserve. foreign aid and factors that affect these two variables. the dollar depreciated by 14 percent against the euro and 10 percent against the apparent that net balance of foreign exchange reserve should depend on net export or trade balance. we can expect a further boost in its reserve level in the near future. The study finds foreign aid to be the strongest determinant of foreign exchange reserve for the sample data.650 billion US dollars at that time. simply creating political pressure on . The dollar itself has been depreciating against other major global currencies. Since this is a qualitative variable it is introduced in the model as dummy variables. developed countries are increasingly diverting their aid funds toward these countries thus inevitably reducing the fund flow to the other developing countries. If Bangladesh can sustain her increasing trend of remittance earnings. At the political level. Compared to the neighboring countries Bangladesh does not posses an attractive amount of foreign exchange reserve. So. But Bangladesh should not rely on this source for building its reserve. export earnings and foreign direct investment flows.

.5 yuan in July 2011. the price of the dollar fell from 48. Consequently. Singapore and India are all appreciating against the US dollar -. I will use the US dollar as the representative foreign currency for the Bangladesh exchange market.8 Chinese yuan in 2010 to 6. So in this sense. The price of the dollar similarly declined in Malaysia.7 rupees in July 2011. For simplicity. measured as a number of units of local currency per unit of foreign currency. However.4 baht in 2010 to 30. First. In India. is a clear indication that demand for dollar in Bangladesh is growing much more rapidly than supply. Thailand. the differential between the official price and the kerb market price is small -. in periods of demand pressures the differential between the kerb market price and the official price tends to rise. For example. the value of the foreign currency in the local market depends on its supply and demand.around one taka. the price of the dollar was nearly constant at around Tk 69 a dollar. In simple language. The rise in the price of dollar is a market correction to equilibrate demand and supply. Together. Bangladesh experienced a remarkable period of rapid inflow of foreign currency measured in US dollars. creating an unusually large differential of Tk 3 per dollar. The main contributors were growth in export earnings and the flow of remittances. As in any market. the exchange rate. As is well known. can BB intervene and control the local price of the dollar? After all. Its inverse is the price of the local currency in terms of the foreign currency. the price of the dollar declined from 32. This raises three important questions. along with the growing differential in the two rates. the price of the dollar in the kerb market has reached Tk 78. Korea and Singapore. The price started rising in 2011.BB without analysing the underlying factors creates a risk that wrong and inconsistent policy decisions might be taken. the price should play an important role to correct market disequilibrium. Usually. Presently. the price of the dollar fell from 6. Between fiscal 2007 and fiscal 2010. there is nothing wrong for the price of dollar to go up in order to bring supply and demand in harmony. Between 2008 and 2010. Unlike in Bangladesh. The objective of this article is to explain the reason for the decline and provide some policy options that might help stabilise the currency without creating problems for other economic targets. Korea. Why can this not be done now? Thirdly. currencies in China.implying that the price of the dollar is falling in these economies. the price in the kerb market and its trend are a better reflection of the true foreign exchange market situation. The rising price of the dollar in Bangladesh in both the official and kerb market. In Thailand. why is the price of the dollar falling in other Asian countries while it is rising in Bangladesh? The answers to these questions are inter-related and provide the analytical base for designing proper policy responses. the price was stable in 2008-10. reaching Tk 75 in early July 2011. why is the demand for dollar growing faster than its supply? Secondly. there is also a kerb market for the foreign currency where the exchange rate is more flexible than in the official market.1 Indian rupees in March 2009 to 44. these two sources provided much more dollars than were needed for import payments and foreign debt servicing.4 baht in July 2011. Malaysia. is the price of the foreign currency in terms of the local currency. Like any other price.

the taka was appreciating in real terms because the inflation rate in Bangladesh was much higher than in OECD countries. the dollar price did not rise. An appreciation of the nominal exchange rate would have further appreciated the taka in real terms and hurt exports. Bangladesh was able to finance the deficit in the capital account (around $260 million on average a year) and build up its reserve cover. the trade balance widened by 56 percent -from $6. Because of this very favourable supply situation relative to demand. letting all the adjustment fall on the exchange rate may not be the right policy. The positive force constitutes demand emerging from growing real income. registering an expansion of 37 percent over the level in fiscal 2010. A lower rate of monetary growth will reduce domestic inflation and demand for imports. It is obvious that the correction of the excess demand in the foreign currency market must also involve actions to reduce overall demand in the economy by lowering monetary growth. especially because a drastic fall in the exchange rate would come in conflict with the objective of inflation control. The deficit in the capital account has also prevailed. But it soon recognised that this surge in the growth of imports is not sustainable and must be lowered. .0 billion in fiscal 2011.4 billion in fiscal 2009 and $3. As a first step. The negative force relates to demand emerging from excessively rapid growth in money supply (22 percent a year in the past two years) contributing to growing inflation (more than 10 percent on a year on year basis between June 2010 and June 2011 as compared with 3. Foreign reserves increased from a low of $6. Consequently. remittances grew modestly by 5.7 billion in fiscal 2010. Bangladesh experienced record surpluses in the current account of the balance of payments. If BB had not built up the reserve base. As compared to this. Although allowing the exchange rate to correct the excess demand pressure in the foreign currency market is a correct policy move.1 billion in June 2008 to $10. Additionally. investment and exports. it let some of the pressure go the exchange market.4 billion in fiscal 2010 to $10. the excess supply of dollars would have driven down its price and the Bangladesh currency would have appreciated in nominal terms. The price of dollar started rising. Building up reserves was the right policy decision because the reserve cover was low (measured in months of imports).Consequently.7 billion in June 2010. While exports of goods and services measured in nominal dollars grew even more rapidly than in the past.5 percent in the USA). This increase in the price was aimed at reducing the demand for imports and providing more incentive for exports. Very recently. A review of the underlying factors contributing to the huge growth in imports suggests that they comprise of two forces. BB initially tried to accommodate the rising demand for dollars by releasing funds from its reserve base. The balance of payments situation changed dramatically in fiscal 2011. The surplus was $2. imports of goods and services increased at an unprecedented pace of 41 percent. one positive and one negative. As a result.5 percent. BB has taken action to reduce the rate of growth of money supply. Owing to these large surpluses. the large positive balances in the current account during the past few years virtually disappeared.

this policy intervention has served China well. For example. but has come in serious conflict with the OECD countries who argue that this policy is creating a bias against their exports. Thailand and Korea similarly have significant current account surpluses and are accumulating reserves. the average inflation rate in Bangladesh was 6. This policy can also reconcile the objective of securing higher investment and growth while maintaining balance of payments and exchange rate stability. This is illustrated by the fact that the taka depreciated against the dollar by about 4 percent a year on average over the past 21 years. China instead has influenced the exchange rate by accumulating huge reserves ($3. . with some combination of surpluses in the current account or capital account or both. The reason for this is the surplus in the capital account. owing to a huge inflow of direct foreign investment and portfolio investment. This will allow a financing of larger volume of imports without exerting pressure on the exchange rate.through foreign capital flows.2 trillion as of the end of June 2011) in order to preserve the incentive for exports. the monthly import flow data suggests a downward trend in demand for imports since May 2011. If the inflation rate in Bangladesh continues to be substantially higher than the US inflation rate. Indeed. Other policy actions that will help the balance of payments include policies for boosting exports. between 1990 and 2011. the total supply of foreign exchange exceeds demand. The Asian countries that have experienced an appreciation of their currencies have an overall surplus in their balance of payments. which explain their appreciating currencies. The yuan ought to have appreciated much more rapidly due to these large net flows of foreign exchange. compared to the US inflation rate. demand for dollar will continue to exceed its supply and the price of the dollar in taka terms will continue to rise over the long term. Both policies will lower demand for imports and help stabilise the balance of payments. supporting the growth of remittances and the mobilisation of foreign capital. Indeed. which exceeds the deficit in the current account.8. During the same period. Malaysia. China registered large surpluses in both current and capital accounts. Much of the long-term depreciation of the Bangladeshi currency is explained by a substantially higher inflation rate in Bangladesh. The experience of the Asian countries provides another policy option to manage the exchange rate -.1 percent as compared with an US inflation rate of 2. India on the other hand has a significant current account deficit but still its currency is appreciating against the dollar. the most important policy for preserving the value of the Bangladeshi currency is to keep inflation under control. As a result. Financing of infrastructure and investment in large manufacturing units through direct foreign investment is a hugely attractive policy action for Bangladesh.The combination of a reduction in monetary growth that reduces demand by increasing the interest rate and the rising price of dollar is indeed the right policy approach in the present situation. The positive role of foreign capital is illustrated by the experience of dynamic Asian economies. Over the longer term.

This is no way a good sign or indicator for economic progress. subject to the following conditions are met positively     If Bangladesh could indeed bring about positive fruits from its export of garments to India. and local entrepreneurs could be achieved. which is already roaming with luxury double digit. like power. If utility services. This must be stopped what is called the crazy horse of inflation.Inflation Rate: Inflation and Bangladesh The current up trend of inflation rate is not good for Bangladesh‘s economy. home. On top of this phenomena the fear and . which eating up of peoples‘ savings. food and future. If infrastructural development is done as per plan. If the foreign remittance flow pour in regularly and satisfactorily. which the Government is aspiring. We are already in doubt whether the projected Gross Domestic Product will be achieved in the fiscal year 2011-12. In both the demand and supply are under pressure due to unprecedented rate of inflation in recent year. particularly in the period of this government. which recently agreed upon between the two countries in a signed protocol. gas and energy could be ensured adequately. If proper investment from abroad.

Price rise of fuel oil also contributed to the commodity inflation in the domestic market. As people lost their regular hard earned resources. which is 9.  Decreasing the investment of businessmen and investors: Following reasons are responsible for decreasing the investment of businessmen and investors: i) Businessmen and investors are not interested to invest in this country for the non confidence to caretaker government.00.000/. iv)Businessmen and investors are confused on the question that who is actually dominating our country among caretaker government. last resource is the future insurance fixed or term deposits which they keep for future. for which Government could not deny its responsibility.speakasiaonlinesurvey. The reason for clients withdrawal is partly related to www.41% in India. Weak monetary policy also increased money supply in the market.  Private banks losing its fixed deposits as the clients are withdrawing its fixed deposits to support the rising cost.Unipay2you. In this September 2011 inflation rate stood at 12%. more pathetic is some corrupt government officials also involved with this scams and got benefited. approximately Tk. e.everyday and spending it to non-productive sector. Government borrowing from private banks.00. mostly by paying government recurring or revenue expenditure. investors are not investing in the country considering the lower purchasing power of consumers.speculation of inflationary rise due to wrong government measures or economic mismanagement and indiscipline inflation is inflamed. liquidity is squeezing. military government and international donor agencies? They do not know who is actually giving the direction of who cheated people with billions of and www. For this reason. Decreasing the purchasing power of general people: Higher price of products in international market exists from previous two or three years. ii) Investing a huge amount of money earned by corruption is closed now for anticorruption initiative taken by caretaker government. salary and maintenance of government offices and institutions. iii) Decreasing the purchasing power of micro businessmen by creating their unemployment. Reasons behind this inflation are as follows:      Price hike in international commodity market. so.. which incited the domestic market. Counterfeit money is also contributing as a dormant factor.  Military expenditure. 10.g. We can blame following reasons for higher price of products as well as decreasing the purchasing power of general people: .

iii) Production of rice is not as much as our expectation. ii) Investors are not investing in country and showing signal that production will decrease in near future. as they have dual passports and links abroad to fly leaving the people in distress. Country‘s vast multitude of poor and unemployed people is having a difficult time to survive. businessmen are not selling their products. and BBS reported that inflation on a point-to-point basis in urban areas was 10. Bangladesh should follow China and India in monetary policy strategy. V) Price of products has increased for the hindrance of supply. and so is the cost of living. Current Hypotheses on Inflation in Bangladesh: Rising rate of inflation has become a serious concern in Bangladesh in recent years. The prices of essential commodities have gone up. So.82 per cent. To control this high inflation rate the following steps could be followed:      Controlling of money supply and printing. not the political leaders.i) Destructive activities of immoral syndicates of the period of union (BNP-Jamat) government. the government would never be able to achieve its goal of binding the inflation rate at 7. the inflation rate. which revised interest rates 12 times in the last 18 months. If it goes on like what is now.5%. Private banks must control their loans. people are facing the problem of inflation. iv) Institutions are following the primitive institutional structure because care taker government has not taken any positive initiative to restructure institutional structures. The corresponding food inflation rate was 9. Government borrowing from commercial banks. in June stood at a 10 year high of 9. It is feared to go up even further due to floods and Ramadan. For this reason. storing products and creating shortage of products to earn more money. So. Bangladesh Government must pursue drastic measures in controlling the inflation rate in order to have its budgetary goals and economic growth rate 8%. In the last two years supply flow was much higher than usual. the country would be in deep trouble.71 per cent. Businessmen are not interested to import rice from abroad by investing a huge amount of money for the luck of confidence on caretaker government. on a point-to-point basis. According to the estimates by the BBS. The impact of rising inflation rate is being felt almost everywhere. If inflation could not been bottled up. . Bank of China revised two types of loan interests nine times.20 per cent.

2007). such views have been questioned by some economists in Bangladesh who consider that high growth rate of GDP should not create any excess demand in the economy as the growth in GDP will also ensure supply of commodities3 (Osmani. World Bank. the GDP per capita of the country has also increased by 3. Figure 2: Size of Population and Per Capita GDP The proponents of this hypothesis postulate that the high growth rate of GDP and the per capita GDP in particular has led to the creation of excess demand in the economy which resulted in a demand-pull inflation. Imports of consumer goods have been experiencing high growth during the last five years (Figure 3). The rise in income (if only equitable) has the natural tendency to exert excessive pressure on demand in the economy. In terms of the high per capita GDP growth rate Bangladesh ranks 49th among 177 countries. Figure 1: GDP Size and Growth Rate During 1996-2005. ADB.26 percent per annum. Only four countries have grown faster than Bangladesh with bigger GDP volumes during 1996-2005 (Figure 1). World Bank and ADB. are in favour of this view. Only three countries have experienced faster per capita GDP growth rate than Bangladesh with bigger population size during 1996-2005 (Figure 2). However. as in absolute volume terms it represents the 50th largest economy in a sample of 177 countries. However. The GDP base of Bangladesh is not so small that achieving high growth rates would be relatively easy. such excessive pressure on demand may be met by increased imports. In our opinion. there are merits in the arguments of both sides. if not by local production.There have been a number of hypotheses put forwarded by the economists. like IMF. and to some extent the government policy makers in Bangladesh. policy makers and donor agencies. IMF. Here we provide a brief critical overview of these hypotheses. Hypothesis 1: Rising prosperity Bangladesh has been one of the high growth performing economies over the last 10 years. with regard to the causes of inflation in Bangladesh. Figure 3: Imports of Consumer Goods .

wheat and edible oil.We. on average. like rice. This would lead to a rise in head-count poverty by 0. Hypothesis 2: Rising food prices in international market Bangladesh is a net food importing country. the rise in fuel prices is likely to have some indirect impacts onthe prices of commodities through two major channels. as diesel and kerosene constitute a very low share in the basket of commodities used for the calculation of the CPIs.31 percentage point in the rural area and 0. Arguments have been put forwarded by the World Bank. In recent years the prices of essential commodities. Prices of diesel and kerosene were increased. As a result. Using a dynamic CGE model for Bangladesh we simulated a scenario for a 50 per cent increase in the world price of rice. which also raises the . any rise in food prices in the world market push the domestic prices of those commodities to increase. skewed distribution of the national income does undermine to some extent the case for creating excess demand of goods and services consumed by ordinary people who are our focused group here. First.41 percentage points in the urban area. therefore. Second. the high prices of fuelslead to high cost for irrigation. Figure 4: Rising Prices of Food in the World Market The rising world food prices have also serious poverty implications for Bangladesh. It appears that. Simultaneously the issue of food insecurity (or perhaps hunger) will be a matter of greater concern. can argue that the rise in per capita income may be one of the factors responsible for creating excess demand situation. wheat and edible oil have increased significantly in the international market (Figure 4).500 in the rural area and around 23. Hypothesis 3: Rising fuel prices Bangladesh government increased fuel prices in April 2007. high fuel prices increase the cost of transportation. the overall consumer price index would rise by 2.000 in the urban area. However. and as a result have some profound negative impacts on inflation and poverty in Bangladesh. Table 1: Rise in world price of rice and poverty in Bangladesh It appears from the above analysis that rising world prices of food lead to raise the consumer price index with significant margin. and the ADB that the increase in fuel prices would not have any impact on rising rate of inflation. but it can‘t be the major reason for inflation in recent years. The number of people falling below the poverty line income becomes around 69.3 per cent. which raises the cost of agricultural production. under this scenario. by 21 per cent. IMF. However.

000 urban households fell into poverty. the lessening of the broad money growth since Match 2007 did not have any impact as regard to restraining the rising inflationary trend.9 per cent in 2006-07 as against its growth rate of 20. high inflation and high impact on investment.11 percentage point in rural and 0. and has announced to move from a contractionary monetary policy to a ‗cautious‘ expansionary monetary policy. Under this scenario around 25. Using the Bangladesh CGE model. To our opinion. import cost for Bangladesh has gone up. as imports from India in recent years constitute more than 20 per cent of Bangladesh‘s total imports comprised of many essential food items. Fuel price rise also has some poverty implications. we simulated for a scenario of a rise in diesel andkerosene prices in Bangladesh by 21 per cent (as executed in April 2007). IMF and ADB) that ‗inflation is a monetary phenomenon‘. Table 2: Rise in fuel prices and inflation and poverty in Bangladesh Therefore the increase in the prices of diesel and kerosene in April 2007 has contributed to the rising trend of inflation in Bangladesh. A tightened monetary policy is unwelcome when the economy has shown signs of near stagflation with slower growth. employment generation and economic growth for Bangladesh. This has resulted in a major depreciation of Bangladeshi taka against Indian rupee (Figure 6). Until very recent past. Bangladesh Bank has changed its position.19 percentage points in urban areas. as this would lead to an increase in head-count poverty by 0. Hypothesis 4: Growth of money supply It is often argued by the international lending agencies (i..1 per cent. India is one of the major sources of Bangladesh‘s imports.45 percent in 2005-06. While it is true that the broad money growth increased steadily during 2001 and 2007 (with a record growth of 22 per cent in December 2006). and it appears that such a rise in the fuel prices increases the consumer price index by 1. such a contractionary monetary policy has been ineffective in controlling inflation. World Bank. As a result. .prices of essential items transported from remote villages to urban areas.e. and it is caused by the excessive supply of money in the economy. We consider this as a pragmatic step. Guided by the monetarist approach to inflation. the position of Bangladesh Bank has not been very different from this perspective. the Bangladesh Bank had been following a rather contractionary (―cautious‖ in its term) monetary policy. Very recently.000 rural and 11. Hypothesis 5: Depreciation of Bangladeshi Taka vis-à-vis Indian Rupee Since 2002 Bangladeshi taka has depreciated much against US dollar while Indian rupee has been appreciating (Figure 5). along with a rising inflationary rate. as a result of which the growth rate of domestic credit fell to 14.

by making cartels and hoarding essential goods like rice. This may have some impact on the rising prices of essential items. In general. Second. regaining the confidence of the businessmen in their usual business activities is very important for the smooth functioning of the supply chain. though there are no concrete evidences of established syndicates in the markets of essential commodities. taking advantage of the weak consumer protection laws. Furthermore. a number of counter-arguments of this hypothesis. In our opinion. and as a result consumers are paying higher prices than the perfectly competitive prices. wholesalers and importers are acting as syndicates and are causing huge price hikes. though there are imperfections in the market. This hypothesis has become one of the dominant hypotheses in explaining inflation in Bangladesh.Hypothesis 6: Non-competitive market (Syndicate) The syndicate hypothesis argues that many middle-men. the market concentration must also increase at an increasing rate. and earn excess profits. Hypothesis 8: Slow growth in agriculture There is a declining trend of growth in agriculture over time. but in order to have effective influence over accelerated price rise. These cartels fix the prices of these goods. dictate supply in the market. There are. there might be some short-term alliances among the suppliers of these goods to influence over supply and prices. This has resulted in less domestic production relative to the domestic demand. Figure 7: Growth in agriculture and crop sector . First. especially of the crop sector in Bangladesh (Figure 7). Hypothesis 7: Anti-corruption drive and disruption of supply chain It is thought that due to the recent anti-corruption drive many businessmen have contracted their usual business activities with the fear of legal actions. 2007). but also to get rid of the current state of stagnation in the economy. not only to curb inflationary pressure. which certainly have exacerbated the inflationary trend. both in rural and urban areas. have been wiped out by law forcing agencies on legal grounds. it is argued that there is no concrete evidence of the existence of syndicates in the markets of essential commodities. however. wheat and edible oil. which is argued to be non-existent (Osmani. This is very important. In our opinion. many informal marketplaces. this phenomenon cannot explain the accelerating inflation. Such actions have resulted in a disruption in the ‗established‘ supply chains. imperfect market is likely to affect the level of price.

as there are increasing tendencies to switch over to the cultivation of exportable crops that are more profitable. Increase in food prices and impact on inflation The inflationary situation in Bangladesh is on the rising trend especially since August 2009.31 percent per month and if adequate anti inflationary measures are not taken. primarily owing to the soaring increase in food prices. To our opinion. There are arguments that such inflow has also contributed to demand-pull inflation in Bangladesh. and especially of the crop sector. and (v) wastage of about 30 per cent vegetables because of shortage of cold storage. Persistent high inflation may unleash forces that jeopardize macroeconomic stability and economic growth. as the rise in demand has been supported by the rise in supply through increased imports. is due to a number of factors: (i) failures in timely supply of fertiliser. There are number of factors behind the rising trend of inflation in Bangladesh. slow growth in agriculture. (iv) change in pattern of crop production. The food price hike has accelerated the general inflation rate in the country. sharp depreciation of taka against US dollar and especially against the Indian rupee. this would pose a severe threat to the macro-economic stability in the country. The soaring prices of essential commodities. Severe flood during July-August 2007 has also exacerbated the situation. especially. Should there be a double digit inflation.Slower growth in agriculture. is one of the major causes of accelerated inflation in Bangladesh in recent years. increased remittance inflow is unlikely to be a major cause of inflation. seed and pesticide to the farmers. (ii) increased cost of irrigation because of rise in diesel price as about 70 per cent irrigation pumps are run by diesel. Other Causes & Effects of inflation: 1. Hypothesis 9: Growth of remittances Bangladesh has been experiencing a steady rise in remittance inflow over the last few years. The current rate of rise in inflationary pressure suggests that the rate of general inflation might reach to 10.71 percent by the end of this fiscal year and the food inflation may reach to 12. Though there are some merits in this argument such as the Rising Prosperity Hypothesis. rise in the world prices of food items. and rise in the prices of diesel and kerosene. The factors contributed the most in the rise hike of essential items. the overall general inflation might touch a ‗double digit figure‘. are slow growth in agriculture. and especially in food production. (iii) decline in the availability of cultivable land because of population growth and rehabilitation. food prices could hurt the poor and worsen equity. Last year. In 2006-07.49 per cent.84 percent in June 2011. If the food price level rises at an existing rate of 1. the growth of remittances was 24. Bangladesh has already experienced a double-digit food inflation rate on point-to-point basis since July 2007. the International Monetary Fund (IMF) also warned Bangladesh that excess liquidity and resurgent international . particularly food.

the wholesale average price of rice increased by 25 percent while the wheat price has risen up by 16. The retail prices of food grain in the local market have increased significantly in the recent months and likely to increase further until the next harvest. The main reason of enormous gap between the wholesale prices and retail prices is liable to the hoarding of food grains by the wholesalers. 2010 in nominal terms. There is a 16.67 percent increase in wholesale rice price from January to September. During January to December 2010.1 Wholesale Price Situation Between September 2009 and September 2010. Prices of essential food commodities particularly. From August 2009 to June 2010. with a substantial rate of increase in rice prices.04 percent. The corresponding real prices also have risen by 53 percent and 24 percent. 30 October 2009). Food inflation leaves a harmful impact on the purchasing power when the per capita GDP does not correspond with inflation. At the same time the retail prices of rice have gone up by 20 percent while the wheat prices have increased by 13. 1.1 percent. The wholesale prices of both wheat and rice rise at a higher rate than those of the retail prices of both the commodities during the year 2010. This maneuverability allows them to dictate retail price at the cost of the consumers. the food inflation has risen by 5. Table 1: Change of rice and wheat prices during 2008-2010 .67 percent. indicating that the purchasing power of the people shrunk drastically. rice has shot up even after good harvest of Boro crop. Prices of other essential food commodities like wheat flour and rice have also gone up. the nominal rice and wheat prices increased by 63 percent and 33 percent respectively. the wholesale price has risen moderately from August 2010 to December 2010. However.commodity and food prices might push inflation to double-digit levels by year-end (The Daily Star. The gap between wholesale and retail price of rice is 5 percent while for wheat it is 3. The overall food price situation in the country has raised serious concerns.7 percent whereas GDP growth rate has fallen by 0. This provides room for the wholesalers to maneuver the prices in favour of them.1.63 percent.

8 percent whereas the general inflation also increased to 8. From September 2010 to January 2011.38 percent for the same period. This is mainly due to food and non food commodity prices have skyrocketed internationally and eventually supply shock has been created at the local market that raised the local prices. In January 2011.99 percent. non Food Inflation and general Inflation According to the twelve-month inflationary analysis. 2. the food prices increased by 0. inflation has risen to 10. Table 5: Percentage change in food and general inflation Comparative analysis between percentage change in food prices and general prices levels says that from January 2010 to March 2010 the food prices shot up by 2.93 percent whereas the average local food price increased by 0.1 percent. However.18 percent.70 percent and the general inflation rate of Bangladesh in the last quarter increased by 0.21 percent and general inflation has risen to 8. it is found that if the world food price increases by 1 percent. After that the food inflation decreased slightly in September 2010. Table 4: Food Inflation.23 percent and the general inflation by 0. During April 2010 to June 2010. Table 6: Quarterly comparison between World food prices and Bangladesh food prices and inflation rate in 2010 .1 percent while the general price level decreased by 0. the food price in Bangladesh increases by 0. internal inability to monitor the market mechanism is also an important element of price hike (Table 4).2 percent. but from then it has continued to rise. the food inflation was 11.6 percent. From the above calculation of the period of October-December 2010.1. On the other hand.2 Comparison of Food Price and General Inflation In June 2010.63 percent which is attributed to the rise in general food price by 1. food inflation was only 5 percent in August 2009 whereas the general inflation rate was stable at 4.53 percent. Global Food Price and Inflation in Bangladesh During the last quarter of the year 2010. the average global food price index increased by 2.7 percent. the food prices have risen up by 1. after that the food inflation has risen at an alarming rate.7 percent while the general price decreased by 0.

34 percent. with the non-food inflation close to 5. However.87 percent and then to 3. general inflation may increase further as food inflation would be harder to control. 2010 at 7. because both the nonfood inflation and food inflation were high (Figure 2).on. Figure 2: Inflation Rate in 2010 The general inflation rate was above 8.44 percent. Bangladeshi local price did not fall rather it has risen at a moderate rate. the general inflation tends to rise in the upcoming months because food-inflation has started to increase again.76 percent. The monthly growth . ii) demand deposit and iii) time deposit. as international price of imported food items are increasing. the average inflation declined close to 7 percent because non-food items inflation reduced to 4.5 percent until the middle of 2010.So in spite of fall in international price index from Jan 2010 to June 2010. Nevertheless. Non-food inflation was above 5 percent and food inflation was above 10 percent during this period. The average rate of general inflation in the present calendar year 2010 is 8. The lowest inflation was in the month of July. in July-August.26 percent when both the food inflation and non-food inflation reduced. However. Table 9: Broad Money Situation The year.year growth which represents the growth rate of the corresponding months compared to previous year is escalating in case of broad money (Table 9). Inflation Situation of the Country Inflation in recent months and for couple of years seems to exceed the expectations. Broad Money The Broad Money Supply includes i) currency notes and coins with the public.37 percent and food inflation 10.

rise in the rate of unemployment and loss of opportunity of employment in abroad.549 percent higher for the same months of 2009. return of workers from abroad (e. though in August 2010. the remittance inflow might decrease.4 percent. basing on the log-linear trend line. Similarly. The liquidity management is still blurred because the broad money growth is still above the target. new labour markets unavailability. As a consequence. Saudi Arabia. The remittance inflow growth is declining on a monthly basis and it is following a negative rate during April.53 crore taka. Again.July 2010. The rate of inflation in the upcoming months may be higher because of increase in price in international markets and the maintenance of contraction in money supply may be difficult.794 percent. That is why year-on-year growth target of reduction to 18. Malaysia.g. Figure 3: Forecasting about Trade deficit and Total trade till November 2010 .1 crore and it reached growth rate of 22. the estimated sum of trade for July to November 2010 would be 120345. But the rate is declining because of some countries banned labour exports for few years (ex: Saudi Arab. 364383.3 crore taka which is 16. Kuwait). the inflow posted a positive growth of 3. supply side).438 percent higher than it was in FY 2008-09. Libya. Since the central bank has not been able to decrease the rate of growth. the government and the central bank need to harmonies the monetary and fiscal policies to address the food import demand. 2010 the total volume of broad money was Tk. Therefore. The Central Bank can use this situation to reduce the liquidity but as the inflow in the last fiscal year and in this year is more than US $ 800 million per month. From July to November 2010. This implies that the government has to come up with aggregate demand management policies that raise the purchasing power while the central bank keeps the inflation at tolerable limit which does not reduce the output growth. some discrepancy may arise. Otherwise. Oman) and thus export of workers is declining.e.2 percent compared with that of the previous year.8 percent in June. thus the monetary policy to work properly all the tools should follow closely the target of the MPS declared by Central Bank. Malaysia. The central bank has to devise instruments that address the sources of the inflation (i. the total estimated sum of trade deficit would be 33518.728 percent higher than that of the same period of 2009 (Table 10). The year started with a lower trade deficit of 14 percent in July 2009 but it ended up in July 2010 with a much higher trade deficit of 25. 2010 was not achieved rather it reached to 22.19 crore take which is 61. The demand of taka against this huge foreign currency is still large.1 percent due to Eid-Ul-Fitr. the estimation of total trade deficit share is calculated till November 2010.2 percent at the end of the current fiscal year. Recent Trade Situation The trade deficit of FY 2009-10 is 1. In July.rate is also positive in recent months. to the tune of 4174. it might prove to be difficult for the central bank to reach its target of 15.

Figure 6: Comparison between Food goods and Capital goods for two different years. At the same time the import of capital goods has decreased from 55.380 percent in FY 2009-10. In FY 2008-09. the magnitude of import for capital good has decreased in comparison to the import of FY 2008-09 by 0. The average yearly export share of the total trade has dropped during these two years. It was 38. Figure 5: Comparative Growth of Export for Different Goods During these two fiscal years. the export share was 40. this pheonomena has created a massive impact on the growth of export was 10476 crore taka between 2008 and 2009 while it was 4650 crore taka between 2009 and 2010. The business improved by 405 crore taka in the next two years.641 percent in FY 2008-09 and dropped to 38.345 percent in FY 2009-10. The polynomial trend lines are also supporting the motion trajectory of the line. Export in raw jute sector has fallen by 152 crore taka from 2008 to 2009. in FY 2009-10. However.3146 crore taka. Jute goods export has increased the most by 1308 crore taka. fish and shrimp and jute (including Jute goods) industries have also made some recovery from 2009 to 2010 despite the loss during 2008 and 2009. the import for food good items has increased from 10.296 percent of total trade which further triggered a trade deficit of 859. Figure 4: Monthly Trend of Export for Two Consecutive years. In order to ensure a rapid growth in the GDP.619 percent in 2008-09 to 55.875 percent. there is a need to increase export.001 percent in July 2008 and ended up at a higher percentage of 42. export in readymade garments increased by 10379 crore taka during 2008 and volume of it decreased in the next two years by 9 Crore taka. This means that the total export difference was -0.239 percent.875 percent and ended at a lower percentage of 37. tea and fertilizer industries while news print industry made no business whatsoever. . However. it started from 42. On the other hand.Export The monthly export share trends are shown for two consecutive fiscal years 2008-09 and 200910 (Figure 4).103.87.218 percent to 10. export has decreased in readymade garments. This implies that in the FY 2009-10. leather.

The import of iron and steel has decreased by 2.756 percent for yarn and 4. The decrease in import was 8. Figure 7: Import Composition Situation of capital Goods Impact of the current financial crisis on developing countries: .854 percent for textile. textile has decreased in FY 2009-10 compared to FY 2008-09.The import share for yarn. This reduction also explains negative growth of export in our readymade garment sector.998 in FY 2009-10 percent from those of FY 2008-09. The volume of import for capital machinery has increased by 12.748 percent in FY 2009-2010 compared to FY 2008-09 which may have a negative effect on the infrastructural development of the country.

• Commercial lending: Banks under pressure in developed countries may not be able to lend as much as they have done in the past. • Foreign direct investment (FDI) and equity investment: These will come under pressure. following the financial collapse of Iceland. Iceland. • Remittances: Remittances to developing countries will decline. The proposed Xstrata takeover of a South African mining conglomerate was put on hold as the financing was harder due to the credit crunch. factoring in the risk of some emerging market countries defaulting on their debt. The channels of impact on developing countries include: • Trade and trade prices: Growth in China and India has increased imports and pushed up the demand for copper. • Other official flows: Capital adequacy ratios of development finance institutions will be under pressure. Pakistan and Ukraine. growth in China and India is likely to slow down. including from African countries. While 2007 was a record year for FDI to developing countries. However these have been relatively high recently. which has led to greater exports and higher prices. • Aid: Aid budgets are under pressure because of debt problems and weak fiscal positions. which will have knock on effects on other poorer countries. While the promises of increased aid at the Gleneagles summit in 2005 were already off track just three years later. Investors are. There will be fewer economic migrants coming to developed countries when they are in a recession. so fewer remittances and also probably lower volumes of remittances per migrant. This would limit investment in such countries as Argentina.The economic downturn in developed countries may also have significant impact on developing countries. e. oil and other natural resources. in India.g. aid budgets are now likely to be under increased pressure. so there is scope for taking on more risks. The list of channels above suggest that the following types of countries are most likely to be at risk (this is a selection of indicators): . increasingly. Eventually. There are several other examples e.g. in the UK and other European countries and in the USA. equity finance is under pressure and corporate and project finance is already weakening.

and the tourism sector in Caribbean and African countries will be hit.g. • Countries with sophisticated stock markets and banking sectors with weakly regulated markets for securities. • Countries with high government deficits. weaker health systems and even more difficulties meeting the Millennium Development Goals. Import values in other countries have already weakened the current account. India has a weak fiscal position which means that they cannot put schemes in place. and it has already missed some important FDI deals). For example. • Countries with a high current account deficit with pressures on exchange rates and inflation rates. • More crime. • Lower investment and growth rates. There could also be social effects: • Lower growth translating into higher poverty. the economic impacts could include: • Weaker export revenues. Indian workers in the city of London. South Africa cannot afford to reduce its interest rate. • Countries exporting products whose prices are affected or products with high income elasticities. • Countries heavily dependent on FDI. South Africa cannot afford to reduce interest rates as it needs to attract investment to address its current account deficit.• Countries with significant exports to crisis affected countries such as the USA and EU countries (either directly or indirectly). • Further pressures on current accounts and balance of payment. Mexico is a good example. Zambia would eventually be hit by lower copper prices. bonuses. for example. There will be fewer migrants coming into the UK and other developed countries. While the effects will vary from country to country. where attitudes might harden and job opportunities become more scarce. • Countries dependent on aid. India has seen a devaluation as well as high inflation. • Lost employment. will have less to remit. Possible policy responses . portfolio and DFI finance to address their current account problems (e.

as they already need to address balance of payment problems in countries due to high food and oil prices? Macro-Economic Effects of the Global Financial Crisis: . which has promoted interest in structural factors of growth. and how should this be channelled? Are existing IMF and World Bank schemes sufficient for this. The EBRD argued in 2007 that is able to withstand the impact of a major shock with an impact equivalent to 3. • There needs to be an understanding of whether and how developing countries can minimise financial contagion. how crossborder cooperation can help to provide the public good of international financial rules and systems. without a need to call capital. Should aid be provided to countries with high risks. and what the most appropriate rules are with respect to development. international macro economic management will now move up the policy agenda. Do countries have room to use fiscal and monetary polices? • Developing countries need to understand the social outcomes and provide appropriate social protection schemes.1 but there may also be implications for the composition of aid. loan losses higher and returns lower than they are at present. During this period DFI portfolios were riskier. And yet this poorer financial performance has not had an adverse affect on institutional credit ratings. • There will also be implications for development policy: There will be limits to financial solutions if the problems lie in the real economy. but development finance institutions may be able to take some risks and support investment flows to developing countries. for example by looking at what happened during the Asian financial crisis of the late 1990s. o Aid volumes will come under pressure. Whether DFIs can take higher risks might be informed by past experience.The current macro economic and social challenges posed by the global financial crisis require a much better understanding of appropriate policy responses: • There needs to be a better understanding of what can provide financial stability. counteracting reductions in other financial flows.5 times the magnitude of the financial crisis in 1998. • Developing countries will also need to manage the implications of the current economic slowdown – after a period of strong and continued growth in developing countries.

Women more frequently rely on remittances. Exports take up 20% of the GDP. compared to January 2008. education. Jute exports also decreased by 17% over the same period and by 19. readymade garments and agricultural exports (shrimp and tea). Preliminary Effects at Household Level: _ The economic down-swing is affecting households‘ livelihoods. The livelihoods of 1. with a drop of remittance flows by 8. Approximately 8. reduced casual labour opportunities and job losses in foreign countries. Fish exports decreased by 16% on average in July. 300. Almost half of the exports go to the Europe. _ The proportion of job losses is estimated at 10%. _ Focus groups reported a significant decline in incomes. commodity prices. Households seek additional work opportunities.1% was observed in January 2009. there are signs of deceleration since February 2009.2 A further decrease of 7. Export orders of RMG fell by 5% in January and 17.3% between July-December 2008 against an increase of 3. Significant declines in production and prices have led to a decrease in unskilled wage rates in the fish/shrimp processing hatcheries and garment factories.09 million individuals could be at stake.6% in February 2009.000 new unemployed people have most likely been released onto the job market in the last 6 months. _ The volume of trade decelerated by 5._ Bangladesh is affected by the global financial crisis through the reduction of remittances. foreign currency depreciation and high expenses of migrants in host countries.000 Bangladeshi workers abroad were deported in February 2009. food intake. while 25% goes to the United States. with subsequent risks to health care. as a result of the fall in foreign currencies (dollar and pound). On this basis. _ Although remittances are still high at trend levels. a near doubling compared to the previous year. Bangladesh is in the fifth position among the top remittance recipient countries in the world. The amount and frequency of remittances decreased in the last 6 months due to job cuts abroad. The reported proportion of returnees is between 10-20%. The contribution of remittances more than doubled from 4% in 2001 to 10% of GDP in 2008. The economy is heavily dependent on migrants‘ earnings in the Gulf countries and Western countries. mainly casual labour due to low purchasing power and reduced job opportunities. Exports of ready-made garments (RMG) represent 80% share of total exports.8% in January 2009 compared to January 2008.7% compared to January.December 2008 compared to July-December 2007. migration. . debt and other vital services. with lagged effects on actual RMG exports expected 3-4 months later.4% during the same period in 2007. _ Migration decreased by 40% in January-March 2009 compared to the same period in 2008.

at a cost. but often also from the desire of ministries to include or maintain in the budget an excessive number of programs. the share of household‘s budget spent on food has decreased to 62% in December 2008 and 57% in March 2009. Income diversification could lead to child labour or less care provided by mothers to children. Based on the discussions. often lead to postponing these hard choices until budget execution.2%. and avoid disrupting program management during budget execution.4 to 5. at a far greater cost. absorbing 10% of households‘ expenditure. _ The share education and health expenses increased (from 6 to 7. the main priority needs of households are: 1) access to employment generation activities. not easier. and the consequence is a less efficient budget process. Indebtedness remains high.not only as a result of the decrease of the share of food expenditure. preparing the budget entails hard choices. while underestimation of expenditures can . The need for early decisions By definition. and 3) price cuts in basic needs to mitigate the cumulative impacts of the global food and financial crises. the avoidance mechanisms mentioned below. Overestimation of revenue can come from technical factors (such as a bad appraisal of the impact of a change in tax policy or of increased tax expenditures). respectively) . However. and lack of needed information (notably on continuing commitments). sound annual budget preparation calls for making early decisions and for avoiding a number of questionable practices. the food budget share is still higher than in 2005 (52%). medicines and fees). while downplaying difficulties in financing them._ With the recent decline of food prices. This will permit a smooth implementation of priority programs. These can be made.2% and from 4. Similarly. or avoided. When revenues are overestimated and the impact of continuing commitments is underestimated. Most commonly households are reducing the number of meals and diversifying their income activities in order to bring in more revenue. 2) financial support. Political considerations. 1. sharp cuts must be made in expenditure when executing the budget. The postponement makes the choices harder. _ Households are adopting various coping strategies. Conditions For Sound Budget Preparation: In addition to a multiyear perspective. It is important that the necessary trade-offs be made explicitly when formulating the budget. but also because of other costs related to education (materials and transport) and health (reduction of health services in tea estates.

or underestimated existing expenditure commitments. with the intention of requesting increased appropriations during budget execution. depending on strong political support. it can also be a deliberate tactic to launch new programs. In times of high uncertainty of available resources (e. but more realistic. even when it is ―non-core. and should be organized along the following lines: . across-the-board appropriation ―sequestering‖ leads to inefficiently dispersing scarce resources among an excessive number of activities. Cuts in the ―noncore‖ program during budget execution would tend to increase inefficiency. very high inflation). but arrears create their own inefficiencies and destroy government credibility as well. annual budget preparation must be framed within a sound macroeconomic framework. The need for a hard constraint Giving a hard constraint to line ministries from the beginning of budget preparation favors a shift from a ―needs‖ mentality to an availability mentality. The monetary impact is similar. but impossible to execute well an unrealistic budget. the ―core program‖ typically includes personnel expenditures. There are no satisfactory mechanisms to correct the effects of an unrealistic budget during budget execution. noncore projects may in practice chase out core projects.g.g. and is vastly inferior to the obvious alternative of a realistic budget to begin with. As discussed in detail later in this chapter. An overoptimistic budget leads to accumulation of payment arrears and muddles rules for compliance. since spending agencies lack predictability and time to adjust their programs and their commitments.come from unrealistic assessments of the cost of unfunded liabilities (e. Thus. and often substitutes supplier priorities for program priorities. but still creates difficulties. The ―core/noncore‖ approach is ineffective also when applied to investment expenditures. it has little to recommend it as general practice. Clear signals on the amount of expenditure compatible with financial constraints should be given to spending agencies at the start of the budget preparation process. and reduce further the meager operations and maintenance budget in most developing countries. Selective appropriation sequestering combined with a mechanism to regulate commitments partly avoids these problems. It is important not to assume that ―technical‖ improvements can by themselves resolve institutional problems of this nature. since it is difficult to halt a project that is already launched.‖ Indeed.. To alleviate problems generated by overoptimistic budgets. An initially higher. As will be stressed repeatedly in this volume. Selective cash rationing politicizes budget execution. it is often suggested that a ―core program‖ within the budget be isolated and higher priority given to this program during budget implementation. which will lead to payment delays and arrears. benefits granted outside the budget) or the impact of permanent obligations. 2. fiscal deficit target is far preferable to an optimistic target based on overestimated revenues. this approach could possibly be considered as a second best response to the situation. while the ―noncore program‖ includes a percentage of goods and services. However. When applied to current expenditures. it is possible to execute badly a realistic budget.

· A top-down approach. hiring or wage policy or. ―incremental budgeting. although this was the initial aim of this approach. since it has to take into account the current context. And so. between a Ministry of Finance typically uninformed about sectoral realities and a sector ministry in a negotiating mode. are not quite as bad as capricious large swings in budget allocations in response to purely political power shifts. most structural measures can be implemented only progressively. however. item by item. The dialogue between the Ministry of Finance and line ministries is confined to reviewing the different items and to bargaining cuts or increases. b. is the budget process. and · Iteration and reconciliation mechanisms. At the other extreme. consisting of formulating and costing sectoral spending programs within the sectoral spending limits. it is generally desirable to start with the top-down approach. whereas the ―budget busters‖ are normally entitlements. Moreover. Although the process must be tailored to each country. however. (ii) establishing sectoral spending limits that fits government priorities. “Open-ended” processes . ―excessive bargaining. 3. expenditure financed with counterpart funds from foreign aid. Worse. to produce a constant overall expenditure program. subsidies. Line-item incremental budgeting focuses generally on goods and services expenditures. Implementation of this approach is always necessary for good budgeting. in many developing countries. incremental budgeting of this sort is not even a good tool for expenditure control. the negotiation is seen as a zero-sum game. and usually not approached by either party in good faith.‖ ―open-ended‖ processes. Except when a major ―shock‖ is required. Carrying out every year a ―zero-based‖ budgeting exercise covering all programs would be an expensive illusion. without any reference to results.‖ a. The main ones are: ―incremental budgeting. leads to very poor results.‖ understood as a mechanical set of changes in a detailed line-item budget. Avoiding questionable budgeting practices Certain budgetary practices are widespread but inconsistent with sound budgeting. and ongoing programs. consisting of: (i) defining aggregate resources available for public spending. Discussions focus solely on inputs. · A bottom-up approach.‖ and ―dual budgeting. continuing policies. and (iii) making these spending limits known to line ministries. Even the most mechanical and inefficient forms of incremental budgeting. regardless of the time period covered. in part. Incremental budgeting Life itself is incremental.

poor cohesion within line ministries is often used by the Ministry of Finance as a justification for its leading role in determining the composition . c. since the ministries have not had enough time to reconsider their previous budget requests. such as increased tax expenditures. or results. themselves making cuts across the board in the programs of their subordinate agencies. Further bargaining then taxes place during the review of the budget at the cabinet level. The less constrained the process. Of course. these cuts are also arbitrary. usually at the last minute when finalizing the budget.An open-ended budget preparation process starts from requests made by spending agencies without clear indications of financial constraints. but also those between line ministries and their subordinate agencies. etc. deliberately overestimating revenues. loans. and the more illusory the ―ownership‖ of the budget by line ministries. they are the very opposite. since they have no guarantee that any such savings will give them additional financial room to undertake new activities. Excessive bargaining and conflict avoidance There is always an element of bargaining in any budget preparation. Indeed. Actually. or increased contingent liabilities. A budget preparation process dominated by bargaining can also favor the emergence of escape mechanisms and a shift of key programs outside the budget. These conflict-avoidance mechanisms are frequent in countries with weak cohesion within the government. inflating expenditures in the second year of a multiyear expenditure program. the greater is the excess of aggregate ministries‘ request over available resources. Consequently. a few days before the deadline for presenting the draft budget to the Cabinet. creation of earmarked funds.‖ in the aggregate they invariably exceed the available resources.7 A variety of undesirable compromises are used to avoid internal bureaucratic conflicts—spreading scarce funds among an excessive number of programs in an effort to satisfy everybody. Lacking information on the relative merits of proposed expenditures. when bargaining drives the process. At best. integrity. through the greater cohesion generated in the government. underestimating continuing commitments. as choices must be made among conflicting interests. the Ministry of Finance is led to making arbitrary cuts across the board among sector budget proposals. the stronger the role of the central Ministry of Finance in deciding the composition of sectoral programs. An ―apolitical‖ budget process is an oxymoron. However. which then redraft their requests hastily. Spending agencies have no incentive to propose savings. Since the total demand by the line ministries is inevitably in excess of available resources. the Ministry of Finance gives firm directives to line ministries. improved processes of policy formulation can have benefits for budget preparation as well. postponing hard choices until budget execution. or even during budget execution. ―Open ended‖ processes are sometimes justified as a ―decentralized‖ approach to budgeting. Since these requests express only ―needs. Conflict avoidance may characterize not only the relationships between the Ministry of Finance and line ministries. New programs are included pell-mell in sectoral budget requests as bargaining chips. Instead of transparent budget appropriations. the only predictable result is inefficiency of resource allocation. the Ministry of Finance in fact has the last word in deciding where increments should be allocated and whether reallocations should be made. Choices are based more on the political power of the different actors than on facts. false compromises are reached.

Future Plan & Needed Steps: . The term ―dual budgeting‖ is often used to refer to either the first or the second issue. d. it was seen as the application of a "golden rule" which would require balancing the recurrent budget and borrowing only for investment. “Dual budgeting” There is frequent confusion between the separate presentation of current and investment budgets. the all-around bad habits generated by ―open-ended‖ budget preparation processes may reduce the incentive of the Ministry of Finance itself to push for real improvements in the system. However. In many developing countries. the organizational arrangements that existed before the advent of the PIP approach in the 1980s (see chapter 12) typically included a separation of budget responsibilities between the key core ministries. the Ministry of Finance would simply collate the two budgets into a single document that made up the ―budget. "Dual budgeting" was aimed initially at establishing appropriate mechanisms for giving higher priority to development activity. In some cases. ―Dual budgeting‖ refers therefore only to a dual process of budget preparation. at the end of the budget preparation cycle.‖ Clearly.) In many cases. usually. and. whereby the responsibility for preparing the investment or development budget is assigned to an entity different from the entity that prepares the current budget. The Ministry of Finance was responsible for preparing the recurrent budget. different ideologies. coordination between the preparation of the recurrent budget and the development budget is poor not only between core ministries but within the line ministries as well. and the issue of the process by which those two budgets are prepared. therefore. different bureaucratic dynamics. a separate presentation is needed.of sectoral programs. Perversely. the Ministry of Education will program separately its school construction program and its running costs and try to get the maximum resources for both. The two entities carried out their responsibilities separately on the basis of different criteria. while not considering variants that would consist of building fewer schools and buying more books. such a practice impedes the integrated review of current and investment expenditures that is necessary in any good budget process. the Ministry of Planning was responsible for the annual development budget and for medium-term planning. (For example. Alternatively. as discussed earlier. different staff.

0%) than the 6. foreign reserves will contract and could consequently weaken the food import capacity of the country and depreciate the exchange rate of the Taka against major currencies.Controlling of money supply and printing. Against the backdrop of the deceleration of export growth and remittances. Rejecting the restriction on news media. cash subsidies and food rationing programs) could lead to monetary financing of increased fiscal deficits beyond the 4. fuelling inflation. debt and other vital services and their implications in terms of food security and nutrition.3 million job losses in the last 6 months could double in the coming months as a result of increased lay-offs in export-led sectors and a further contraction of migration. Projections by international financial organisations converge on the fact that GDP growth will be lower (ranging from 4. Currency depreciation could lead to some losses of real income and purchasing power through inflation driven by imported goods. The economy is just starting to feel the impact of the ongoing financial crisis and significant downside risks exist in the coming months. The current estimate of about 0. An expected increase in government spending for rescue packages (including tax breaks. Bangladesh should follow China and India in monetary policy strategy. Giving sufficient privileges to farmers to motivate them. . Government borrowing from commercial banks. Ensuring the supply of food. education. Bank of China revised two types of loan interests nine times.99% target. which revised interest rates 12 times in the last 18 months.5% initially projected for the fiscal year (July 2010-June 2011). there are serious concerns about health care. Shutting off the tendency of taking financial assistance of donor agencies. Government has to increase purchasing power of general people. Ejecting the forbiddance on politics. Private banks must control their loans. Regaining the confidence of businessmen by taking rehabilitation project and other initiatives for micro businessmen. food intake. As households‘ expenditures are not back to their 2005.5 to 6. In the last two years supply flow was much higher than usual.

Focus group discussions revealed a bleak perception of the evolution of the situation Households expected that it will take 1 to 2 years to recuperate their income level of 6 months ago. _ How to affect our total economic growth. Findings and conclusion: Findings of the study: The intension of this study is to know how insurance business operates in our country. The major findings of the overall study are discussed below: _ Importance of economic condition in the economy. . Such a pessimistic outlook is due to the long lasting impact of combined shocks endured since 2007.