Growth in Bangladesh

Growth averaged 5.4% per year over the FY01-05 period, which has been the highest 5-year average since the countrys independence. Growth was underpinned by: y y y y y Resurgence in private investment, which grew at an annual average rate of 10% and increased its share in GDP from 16% in FY01 to 18.5% in FY05. The share of public investment fell from 7% to 6% during the same period. Growth has been fairly broad-based, although it has benefited from strong exports, mainly in the garment exports. Large remittance inflows fueled growth in construction and services sectors. In agriculture, growth has been rather anemic, averaging just 2% over the same period.

On the policy side, a good record on growth seems to have benefited from impressive macro stability. Inflation hasnt touched double digits for almost two decades, while public and external debt situation is fairly comfortable. Saving and investment rates, currently at about 24%, are relatively high compared with other countries at similar income levels. The pace of human development, which is a key contributor to growth and includes progress in health, education and social protection, has surpassed that of most low income countries (LDCs). Constraints to Growth Bangladesh s growth challenges are two-fold: y y How to ensure sustainability of the 5-6% growth over the long-term How to raise growth to the 7-8% range, which is desirable and needed to meet the governments poverty reduction goals

The key constraints to improved growth performance include: Inadequate infrastructure, especially power and ports. There hasnt been any increase in generation capacity of power supply for a few years, mainly due to governance-related problems. Bangladesh s main port, Chittagong port, is among the most inefficient and cost ineffective in the region. Governance: Many important aspects of governance are very weak. Transparency International has ranked Bangladesh last in its corruption ratings for five years in a row. This extracts a significant price in terms of lost growth potential. Urbanization: Urbanization has been rapid and largely imbalanced. A quarter of the population now lives in urban areas, while in 1960 the number was just 5%. Fifty percent of GDP is spent on urban activities. Urbanization has been skewed toward Dhaka, making it among the fastest growing metropolises in the world. This is adding to growing concerns about congestion, lagging urban planning and management, and skyrocketing real estate prices. Export competitiveness: Bangladesh is one of the most closed economies in the world. Opening up trade has to be one of the pillars of future growth. Growth dividends from trade openness will depend

upon concomitant investment climate reforms to boost competitiveness of domestic firms. However, the country should take into account how a reduction in tariffs will affect revenue considering that tariffs constitute about 50% of the already weak tax collection effort.

The financial sector: Financial depth (measured as M2/GDP) is quite low and the range of financial services quite rudimentary. Many of the important contractual savings institutions are absent, while capital markets are extremely shallow. There is a problem of the "missing middle," those people who arent covered neither by the micro finance institutions nor the formal banking sector. The public banking sector remains riddled with non performing loans, despite recent improvements.

Education: Despite the impressive improvements, many problems plague the education system. Its quality is weak with a huge rural/urban gap and not relevant to market needs. Tertiary education and vocation studies have been largely neglected. The IT revolution, which has benefited India and, to a lesser extent Pakistan, has largely bypassed Bangladesh. World Bank Assistance in Support of Governments Growth Initiatives The World Bank is helping Bangladesh address its main growth areas through a mix of analytic work, technical assistance, and lending. Analytic work has focused on investment climate issues, export competitiveness, the post Multi-Fiber Agreement (MFA) situation and strategy for long-term growth and employment issues. On the lending side, a series of development support credits, (DSC I, DSC II,and DSC III) have supported structural reforms in infrastructure, financial sector, trade, governance, and tax administration. The Banks other lending operations include an Enterprise Growth and Bank Modernization Project, Rural Transport Improvement Project, and a series of Education Sector Adjustment Credits (SAC I and SAC II).