BANGLADESH DEVELOPME NT UPDATE Towards more, better and inclusive jobs September 2017 The World Bank Office, Dhaka Plot E-32, Agargaon Sher-e-Bangla Nagar Dhaka – 1207, Bangladesh Tel.: (880-2) 5566-7777 Fax: (880-2) 5566-7778 www.worldbank.org/bd Standard Disclaimer: This volume is a product of the staff of the International Bank for Reconstruction and Development/ The World Bank. The findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Copyright Statement: The material in this publication is copyrighted. 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Photo Credits: Cover: ©The World Bank, 2017 Printed in Bangladesh Table of Contents Preface ............................................................................................................................................. iii Acknowledgement............................................................................................................................ iii Abbreviations and Acronyms .......................................................................................................... iv Executive Summary ..........................................................................................................................1 Recent Economic Developments .......................................................................................................3 Growth and Poverty Trends..........................................................................................................3 State of Major Growth Drivers ............................................................................................................. 6 Assessment of Official Growth Estimates .......................................................................................... 10 Macroeconomic and Financial Stability ...................................................................................... 11 Inflation ............................................................................................................................................... 11 Monetary Developments ..................................................................................................................... 12 The Financial Sector ........................................................................................................................... 13 Balance of Payments and the Exchange Rate ..................................................................................... 15 Fiscal Outturns .................................................................................................................................... 18 Structural Reforms ......................................................................................................................... 19 Overall Progress in the Labor Market ............................................................................................ 21 Outlook, Risks and Policy Challenges ............................................................................................. 26 Appendix ........................................................................................................................................ 33 i List of Figures Figure 1: Agricultural Growth, annual (%) ................................................................................................... 4 Figure 2: Industry and Services Growth, ...................................................................................................... 4 Figure 3: Investment and Savings Growth (% of GDP) ............................................................................... 6 Figure 4: Export Growth (%) ........................................................................................................................ 7 Figure 5: Remittances Growth (%) ............................................................................................................... 8 Figure 6: Inflation rate, y-o-y (%) ............................................................................................................... 11 Figure 7: Private Sector Credit Growth, annual (%) ................................................................................... 12 Figure 8: NPL as % of Outstanding Loan ................................................................................................... 13 Figure 9: Interest Rate Movement .............................................................................................................. 13 Figure 10: Capital Market Trends ............................................................................................................... 15 Figure 11: Net Sale of NSC ........................................................................................................................ 15 Figure 12: Real Effective Exchange Rate ................................................................................................... 17 Figure 13: Foreign Exchange Reserves ...................................................................................................... 17 Figure 14: Inter-bank and Informal Exchange Rate.................................................................................... 17 Figure 15: Summary of key labor market developments: annual growth (2003-2016) .............................. 21 Figure 16: Export Growth: 2003-2015 (left); remittances as a share of GDP and growth in remittances (right) .......................................................................................................................................................... 22 Figure 17: GDP per capita and employment annual growth rates, 2003-16 ............................................... 23 Figure 18: RMG sector employment (1000s) and female LFP rates, 2006-16 (percent)............................ 23 Figure 19: Distribution of economic units, by type .................................................................................... 23 Figure 20: Distribution of employment sector and status by gender in 2016 ............................................. 24 Figure 21: Trends in unemployment rate by gender and location: youth vs. non-youth ............................ 25 Figure 22: Monthly Export Growth (y-o-y, %)........................................................................................... 27 Figure 23: Monthly Remittance Growth (y-o-y, %) ................................................................................... 28 List of Tables Table 1: Contribution to Growth................................................................................................................... 3 Table 2: Accounting for Remittance Decline ............................................................................................... 9 Table 3: High Frequency Indicators (%)..................................................................................................... 10 Table 4: Monetary Program Performance ................................................................................................... 12 Table 5: Selected Banking Sector Indicators .............................................................................................. 14 Table 6: Selected Balance of Payments Indicators ..................................................................................... 16 Table 7: Fiscal Outcomes............................................................................................................................ 18 Table 8: Bangladesh Macro Poverty Outlook Indicators ............................................................................ 27 List of Boxes Box 1: Floods Strike Twice in a Row ........................................................................................................... 5 Box 2: Doing Business Reforms in Bangladesh ......................................................................................... 30 ii Preface The objective of this report is to share perspectives with the Government of Bangladesh, think tanks and researchers, the public as well as the Bank’s senior management on the state of the economy, outlook, risks, progress on structural policy reforms and key challenges the economy is currently facing. The coverage includes developments in the real sector focusing on poverty, growth, and inflation; external sector developments focusing on the balance of payments, foreign exchange reserves and the exchange rate; fiscal developments focusing on revenue mobilization, public expenditures, and deficit financing; financial sector developments focusing on credit and interest rates; and monetary developments. This update also assesses the progress in Bangladesh’s labor markets and concludes with an exposition of the policy challenges that need to be addressed to accelerate the creation of quality jobs. Acknowledgement This report was prepared by a team comprising of Zahid Hussain (Lead Economist), Sheikh Tanjeb Islam (Economist), Sabiha Subah Mohona (Research Analyst), and Shegufta Shahriar (Team Associate). Valuable contributions on labor market progress and policy challenges were made by Syud Amer Ahmed (Senior Economist), Laurent Bossavie (Social Protection Economist), Yoonyoung Cho (Senior Economist), and Thomas Farole (Lead Economist) based on the forthcoming Bangladesh Jobs Diagnostic report. Mona Prasad (Lead Economist) and Christian Eigen-Zucchi (Program Leader) provided extremely useful comments. Manuela Francisco (Practice Manager) provided overall guidance in the preparation of this report. iii Abbreviations and Acronyms ADP Annual Development Plan ADR Alternative Dispute Resolution BB Bangladesh Bank BBS Bangladesh Bureau of Statistics BC Bills for Collection BDT Bangladeshi Taka BERC Bangladesh Energy Regulatory Commission BEPZA Bangladesh Export Processing Zone Authority BEZA Bangladesh Economic Zone Authority BGMEA Bangladesh Garment Manufacturers and Exporters Association BIDA Bangladesh Investment Development Authority BERC Bangladesh Energy Regulatory Commission BRAC Bangladesh Rural Advancement Committee BSEC Bangladesh Securities and Exchange Commission BTRC Bangladesh Telecommunication Regulatory Commission CAGR Compound Annual Growth Rate CAR Capital Adequacy Ratio CBR Correspondent Banking Relationship CPI Consumer Price Index DAE Department of Agricultural Extension DSE Dhaka Stock Exchange DTF Distance to the Frontier EMDEs Emerging Markets and Developing Economies EPB Export Promotion Bureau EPZ Export Processing Zone EU European Union FCB Foreign Commercial Banks FDI Foreign Direct Investment FI Financial Institution FSC Financial Stability Council FY Fiscal Year GCC Gulf Cooperation Council GCI Global Competitiveness Index GDP Gross Domestic Product GoB Government of Bangladesh G2G Government to Government IDRA Insurance Development and Regulatory Authority IMF International Monetary Fund JICA Japan International Cooperation Agency km Kilometer KSA Kingdom of Saudi Arabia LC Letter of Credit LFP Labor Force Participation LFS Labor Force Survey LNG Liquefied Natural Gas LTU Large Taxpayers Unit MLT Medium and Long Term mmcfd Million cubic feet per day mmt Million Metric Ton MoU Memorandum of Understanding MPS Monetary Policy Statement iv MRA Microcredit Regulatory Authority NBR National Board of Revenue NPL Non-Performing Loan NSCs National Savings Certificates NSSS National Social Security Strategy NTMs/NTBs Non-Tariff Measures/Non-Tariff Barriers PAU Policy Analysis Unit PCBs Private Commercial Banks PE Price-to-Earnings PTA Preferential Trade Agreement RED Research and Evaluation Department REER Real Effective Exchange Rate RM Reserve Money RMG Ready-Made Garments ROA Return on Assets ROE Return on Equity RoO Relaxation of rules of origin SA South Asia SCBs State-owned Commercial Banks SD Supplementary Duty SDBs State-owned Development Banks SLR Statutory Liquidity Requirement SMEs Small and Medium Enterprises SOB State-Owned Banks TDTL Total Demand and Time Liabilities Tk Taka ToT Terms of Trade TVET Technical and Vocational Education and Training UAE United Arab Emirates UK United Kingdom UN United Nations UNESCAP United Nations Economic and Social Commission for Asia and Pacific UNHCR United Nations High Commission for Refugees USA United States of America VAT Value Added Tax WEF World Economic Forum Y-O-Y Year-on-Year v Executive Summary The economy is moving forward at a strong pace despite internal and external headwinds. Poverty reduction underpinned by job creation has continued, albeit at a slower pace due to lower remittances, flat exports, higher food prices and adverse natural shocks. Macroeconomic management has remained prudent, as reflected in decelerating inflation and rising foreign exchange reserves. However, the banking system remains stressed with high levels of non- performing loans (NPLs), while financial development is hampered by the dominance of National Saving Certificates as a key source of deficit financing. Structural reforms have not only stalled but also slipped. Despite an improving global outlook, growth in Bangladesh is projected to slow to 6.4 percent in FY18. Downside risks include the resurgence of political instability in the run up to elections planned for early 2019, and a hardening of credit constraints with increased insolvency of banks due to rising NPLs. Excess liquidity and reduced fiscal space associated with costly domestic financing of the budget deficit present latent risks to macroeconomic stability. The near and medium-term policies must focus on more and better jobs creation. To this end, comprehensive and well- coordinated policy efforts are needed that aim to (i) improve the macro and business environment; (ii) strengthen regional and sectoral policies; and (iii) enhance the labor market and skills. Despite some headwinds, the Bangladesh economy continued to maintain healthy growth. GDP growth in FY17 is officially estimated at 7.24 percent. Among the drivers, manufacturing and services contributed the most on the supply side, while private consumption and public investment contributed on the demand side. The overall investment rate has increased, underpinned by a rise in public investment where quality is a concern; private investment remained lackluster, while volatile exports experienced a growth deceleration and remittances through official channels plummeted. Macroeconomic stability sustained. Non-food inflation slowed to 4.6 percent and headline inflation decelerated to 5.4 percent in FY17, aided by prudent monetary management and weak aggregate demand. A robust financial account surplus in the balance of payments boosted official foreign exchange reserves despite a $1.5 billion current account deficit. The exchange rate has depreciated both in nominal and real effective terms in recent months, a correction that was long overdue. Lending rates continued to decline, though at a very sluggish pace not commensurate with the size of excess liquidity in the financial sector. The banking system remained stressed by the high level of NPLs and the concentration of loans. The fiscal deficit has increased to nearly 5 percent of GDP, with more than half of the deficit financed from expensive domestic sources. Survey evidence reaffirms declining poverty trends. The share of the population living under the official upper poverty line fell from 31.5 percent in 2010 to 24.3 percent in 2016/17, continuing Bangladesh’s trend of impressive poverty decline. Between 2010 and 2016 poverty fell both in rural and urban areas, but the reduction was larger in rural areas. Although poverty rates have been falling consistently, the shortfall or depth of poverty has remained constant over the past years. The resilience of poverty reduction cannot be taken for granted. The annual pace of poverty reduction slowed since 2010. Officially recorded remittances declined by 16.6 percent in FY16-17, which may have contributed to the deceleration. In addition, urban households may have been impacted by flat garment exports and rising food prices. Of late, natural disasters (landslides, above normal floods, fungal disease blast attacks affecting crop yields) may have countered gains in reducing poverty. Severe monsoon flooding in the north and north-eastern regions has adversely affected the livelihoods of over 8 million people in 32 districts, which could have deepened poverty temporarily or even permanently for some. Substantial progress in jobs outcomes. Between 2003 and 2016 the Bangladesh economy generated more than 1.15 million net jobs per year, on average, among the working age (15-64) population, with overall employment growing 2.4 percent annually. Trade integration through exports in the ready-made garments (RMG) sector has been a critical catalyst of job-creating industrialization and urbanization. A large inflow of remittances from migrants has likely contributed to boosting domestic demand. Still, the pace of job 1 creation has fallen sharply in recent years. While other manufacturing sectors are growing rapidly to meet increasing domestic demand, export oriented sectors beyond RMG need to emerge to create quality jobs on a large scale. Structural reforms stagnated or experienced slippages. The government made moderate progress on large infrastructure projects, while at the same time back-tracking on key reforms in taxation and the financial sector. With elections slated for the middle of FY19, the government is likely to avoid sensitive structural reforms over the next two fiscal years. Growth is projected to remain robust. Growth in advanced economies - Bangladesh’s major export markets - is projected to pick-up modestly to 1.9 percent in 2017, and stabilize at 1.8 percent in 2018. The growth rates of Bangladesh’s exports and remittances are projected to recover, but remain below their historic double-digit averages. This together with the damages caused by floods to agricultural output and infrastructure could drag growth down in FY18 to 6.4 percent, followed by a rise back to 6.7 percent in FY19. Macroeconomic stability could come under pressure. Inflation may accelerate to nearly 6 percent because of overheating and supply shocks. However, prudent monetary management is expected to keep inflation in a manageable range. The current account deficit is expected to persist. The budget deficit is likely to increase, and not just because of election pressure on public expenditures and revenue mobilization. The public debt to GDP ratio is projected to rise, but remain below levels associated with debt distress. Downside risks are primarily domestic. The downside risks to the outlook include a revival of political unrest in the run-up to elections, a protracted slowdown in key export markets (particularly the EU and US), a further easing of remittances, a hardening of credit constraints, and a weakening of corporate governance in the banking system. Excess liquidity and a reduction in fiscal space through cost inefficient domestic financing of the budget deficit present latent risks to macroeconomic stability. Export demand and remittances could surprise on the upside. Reforms need acceleration. Notwithstanding laudable achievements in reducing poverty and boosting shared prosperity, Bangladesh’s near and medium-term policy challenges remain formidable. Investment needs are large, both for increasing productivity and employment. Bangladesh must take advantage of the global recovery to undertake institutional and market reforms, which can attract domestic and foreign private investment as well as stimulate innovative activities to help sustain growth in the long term. A policy agenda for more, better, inclusive jobs. Comprehensive and well-coordinated policy efforts are needed to deliver shared prosperity for all parts of Bangladeshi society. Policies related to the investment climate will be necessary to promote more trade and investment, diversify the manufacturing sector, and expand high-productivity services. For labor markets, actions will need to promote the quality and relevance of education and skills of workers, provide services to link workers to job opportunities in both domestic and international markets, and facilitate entrepreneurship. These will need to be delivered while also expanding worker protection and social insurance. Finally, sectoral and regional policies will be needed to strengthen firm capabilities, extend domestic supply chains, and encourage innovation, while supporting the development of secondary cities and facilitating urban-rural connectivity. 2 Recent Economic Developments Despite significant headwinds, the economy continued to impress with healthy growth. Among the drivers, manufacturing and services contributed most on the supply side while private consumption and public investment contributed on the demand side. A big anomaly on the demand side estimates was “statistical discrepancy”. In addition, the official growth estimate for FY17 is hard to reconcile with high frequency indicators. Growth and Poverty Trends Healthy output growth sustained. Officially reported output growth rose to 7.24 percent in FY17 from 7.1 percent in the preceding fiscal year, driven by both services and manufacturing growth. On the demand side, private consumption and public investment contributed, but a large contribution of “statistical discrepancy” remains puzzling (Table-1). Table 1: Contribution to Growth FY12 FY13 FY14 FY15 FY16 FY17 GDP Growth 6.5 6.0 6.1 6.6 7.1 7.2 Contribution of Production Sectors (%) Industry 2.47 2.59 2.27 2.74 3.24 3.18 o/w Manufacturing 1.70 1.80 1.60 1.93 2.26 2.21 Services 3.40 2.90 2.90 3.00 3.21 3.31 Agriculture 0.50 0.40 0.70 0.53 0.43 0.50 Import Duty 0.10 0.13 0.16 0.28 0.24 0.25 Contribution of Expenditure Components (%) Consumption 3.02 3.77 3.09 4.29 2.41 3.24 Private consumption 2.90 3.48 2.70 3.84 1.97 2.96 Government consumption 0.20 0.29 0.40 0.45 0.44 0.28 Investment 3.10 1.63 2.98 2.23 2.81 2.82 Private Investment 2.30 0.42 2.19 1.46 2.47 1.34 Government Investment 0.80 1.21 0.79 0.77 0.34 1.48 Resource Balance -0.05 0.20 0.36 -1.25 1.90 -0.85 Exports, goods & services 2.40 0.50 0.63 -0.54 0.38 -0.10 Imports, goods & services -2.50 -0.30 -0.30 -0.70 -1.52 0.75 Statistical discrepancy 0.45 0.40 -0.37 1.28 0.00 2.03 Source: Bangladesh Bureau of Statistics (BBS) Preliminary estimates show the agricultural sector’s contribution to growth increased from 0.43 percentage point in FY16 to 0.5 percentage point in FY17. Timely availability of inputs and finance helped achieve good acreage and hence a higher growth estimate of 3.4 percent in FY17 compared to 2.8 percent in FY16 (Figure-1). However, back-to-back disasters – flashfloods in haor areas and Chalan Beel in Natore, intense rainfall in almost all parts of the country, and fungal disease blast attacks—caused a significant production setback that will not have been factored in the BBS’s preliminary estimate of agricultural growth. 3 Food production short of target. The Department of Agricultural Extension (DAE) set a target for domestic food grains (rice and wheat) production at 36.6 million metric tons (mmt) in FY17, which is about 1.5 percent higher than the actual production of 36.1 mmt in the past year. The production of aman is 1.28 percent higher but that of aus is 1.27 Figure-1: Figure Agricultural 1: Agricultural annual (%) Growth,annual Growth, (%) percent lower than the previous year’s production. Per unofficial estimates of 7.0 DAE, wheat production in FY17 is 1.4 6.5 6.2 mmt, which is almost the same as the 6.0 production target. Following the first 5.5 flashflood in Sunamganj and few other 5.0 4.5 4.5 4.4 adjoining haor-rich districts, the DAE 4.5 estimated a boro crop loss of 8-10 lakh 4.0 3.5 3.3 3.4 tons on 2 lakh hectares gone under 3.5 3.0 water. After an unusually early 2.8 3.0 2.5 flashflood struck the back swamp of 2.5 the northeastern regions in late March 2.0 2017, the DAE estimated that boro FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 output would be significantly below the 19.2 mmt production target. Under Source: Bangladesh Bureau of Statistics these circumstances, total food grains production in FY17 is likely to have been lower than the target. Manufacturing dominated industrial growth. The contribution of the industry sector was about 3.18 percentage points, compared with 3.24 percent percentage points in FY16. Industry’s contribution is underpinned by the manufacturing sector, which accounted for 70 percent of the sector’s contribution, despite much weaker export growth. However, real estate business has Figure-2: Figure Industry and Services 2: Industry Growth, and Services annual (%) Growth, improved in recent times, thanks to 12.0 annual (%) property price corrections, falling 11.0 11.1 interest rates on home loans and 10.5 10.0 sustained political stability. An 9.0 9.6 9.7 increasing number of customers placed 9.0 new bookings in FY17. 8.0 8.2 7.0 Services contributed the most. The 7.0 6.6 6.5 contribution of the services sector was 6.0 5.8 6.2 6.2 3.31 percentage points, compared with 5.8 5.0 5.5 3.21 percentage points in FY16 (Figure- 5.1 4.0 2). Its contribution stems from mainly FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 the growth of public administration and defense, education, health and social Industry Services works, and wholesale and retail trade; Source: Bangladesh Bureau of Statistics repair of motor vehicles, motorcycles and personal and household goods. These sectors account for 50.2 percent of the estimated 3.31 percentage point growth contribution from the services sector. Poverty has continued to fall, albeit at a slower pace. The share of the population living under the official upper poverty line fell from 31.5 percent in 2010 to 24.3 percent in 2016/17. This represents a 24.5 percentage point reduction in the upper poverty rate since 2000, and a 7-percentage point fall since 2010. The latter is a slower annual rate of poverty reduction than before 2010. Also, although poverty rates have been reducing consistently, the shortfall or depth of poverty has remained constant over the past years. Officially recorded remittances declined by a cumulative 16.6 percent in FY16 and FY17 and this may have contributed to the deceleration in progress reducing poverty. In addition, urban households may have been 4 impacted by declining garment exports growth and rising food prices. Between 2010 and 2016, poverty fell both in rural and urban areas, but the reduction was larger in rural areas. Of late, natural disasters (landslides, above normal floods, fungal blast attacks affecting agricultural production) and rising food inflation, may have countered gains in reducing poverty. Severe monsoon flooding in the north and north-eastern regions has affected the livelihoods of over 8 million people in 32 districts, which could have deepened poverty temporarily or even permanently for some. Before the country could recover from the losses it suffered from an extensive flood in May-June, another flood of far greater magnitude struck 32 districts in northeastern, northwestern and central regions. Innumerable houses, hundreds of schools, roads and other structures have again gone under water (Box -1). Aman seedbeds have been destroyed and fish stocks, lost. Many affected families had problems in finding raised lands for their livestock. Scarcity of food and pure drinking water also emerged as a serious problem. Bangladesh is facing a massive influx of Rohingya refugees from Myanmar. More than 400,000 people from the minority group in Buddhist majority Myanmar crossed over into Bangladesh in less than three weeks since August 25. Bangladesh authorities, United Nations Agencies and NGOs have been struggling to provide food, shelter, water and medicine to so many people in such a short time. The UNHCR fears if the current trend continues, the number of refugees could cross 1 million. The influx was triggered by the Myanmar army’s response to insurgent attacks on 30 police posts and an army base in Rakhine on August 25, 2017. Box 1: Floods Strike Twice in a Row Bangladesh’s vulnerability to natural disasters was proved again this year with two consecutive floods in April and August. Bangladeshis are familiar with flash floods and associated damages, but the second surge of flooding in August is marked as the worst in recent years. It submerged 32 districts in the north and central parts of the country, with the overflowing of the Brahmaputra-Jamuna river affecting 8 million people and killing at least 140. The two consecutive floods brought grave risk to food security. The floods destroyed about 623,402 hectares of crops. Simultaneously, rice stocks in government silos hit their lowest levels in six years, leading to a sharp rise in the rice price by 19.4 percent since the first flash flood hit the Haor (wetland) basin in April. An estimated 0.8 million tons of boro rice was damaged during the Hoar flash flood. Along with that, 18,835 hectares of the aus crop and 7,687 hectares of the aman crop went under water since June 26. During the same period, 2,554 hectares of aman seedbeds, 20,125 hectares of jute, 3,806 hectares of vegetables, 412 hectares of sugarcane, 130 hectares of shifting crops in the hill tracts districts and 206 hectares of standing chili crop and orchards was reportedly submerged. In addition, these two floods also caused damage to water borne animals. The floods have so far caused about Tk. 36 million worth of livestock damage, that includes damage to cattle, buffalo, goats, sheep, ducks and poultry flocks. Sending aid to the affected area is a major challenge. Communication with the north is hampered by severe damage to roads and highways. So far, 9,000 km of roads and 457 bridges and culverts are reportedly damaged. Rail communication also had to be suspended due to flooding. Approximately 100 km of rail lines are damaged. Flood affected people are at risk of water-borne diseases. They need fresh drinking water, food and medicines on an urgent basis. The government and international organizations are pulling together their resources to help meet their immediate needs. Besides causing immediate hardship, floods lead to long-term adverse consequences in terms of assets and income losses as well as a rise in expenditures. The Research and Evaluation Department (RED) of the Bangladesh Rural Advancement Committee (BRAC) recently estimated the monetary impact of the floods in the haor areas at about Tk 60 billion ($750 million). These include destruction of assets (cows, ducks, withdrawing children from schools, depletion of savings), loss of labor man-days in agriculture and other activities, and extra expenditures for treating water-borne diseases. 5 State of Major Growth Drivers The investment rate has increased, underpinned by a rise in public investment but raising concerns about quality. Private investment remained lackluster, while volatile exports experienced a growth deceleration and remittances through official channels plummeted. Investment and savings. Figure-3: Figure Investment and Savings 3: Investment Growth and Savings (% of(% GDP) Growth of Investment as percent of GDP is GDP) estimated to have risen by 0.6 32.0 30.5 30.3 percentage points to 30.3 percent in 30.0 29.4 FY17, driven entirely by increase in 27.8 public investment (Figure 3). 28.0 28.3 However, the investment-GDP 26.0 26.2 26.1 26.2 ratio is still below the Seventh Five Year Plan’s (7FYP) target of 30.9 24.0 percent. Real private investment 22.0 22.2 grew by 5.4 percent, but the private 20.6 investment rate remained stagnant 20.0 19.2 at 23 percent of GDP after 18.0 increasing 0.9 percentage point in FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY16. The domestic savings-GDP Gross Investment Gross Domestic Saving ratio is estimated to have risen by Gross National Saving about 1.1 percentage points to 26.1 Source: Bangladesh Bureau of Statistics percent in FY17, while the national savings-GDP ratio declined by 0.5 percentage point to 30.3 percent in FY17. Surge in imports of capital machinery. Bangladesh’s import payments, based on letters of credit (LC) settlement data, rose by 10.5 percent in FY17.1 Imports of industrial raw materials and capital goods have grown by 3.3 percent and 37.4 percent, respectively. An analysis of the structure of imports over the last five years do not show any major shift. However, the share of capital goods has been on the rise – from 20 percent in total imports in FY13 to 31.3 percent in FY17. The share of capital machinery has also increased significantly. With the undertaking of several mega projects, equipment imports have risen considerably. Export growth has declined. The growth of export earnings was only 1.7 percent in FY 17 (nominal U.S. dollar terms) compared with 9.8 percent in FY16. In real terms, exports declined by 0.6 percent according to preliminary estimates released by BBS. In FY17, the government had set an export target of US$ 37 billion which was missed by nearly US$ 2.2 billion. The weak performance is mainly attributable to the fall in the RMG earnings, largely driven by the 2.3 percent decline in woven garments. Overall RMG growth was only 0.2 percent. Non-RMG growth was strong in FY17, thus helping to keep overall export earnings growth positive. Non-RMG growth drivers were mainly pharmaceuticals (8.6 percent), light engineering (35 percent) and non-RMG manufactured goods (13.4 percent). Since RMG exports dominate overwhelmingly, the non-RMG exports were unable to raise total export growth significantly. The performance in non-RMG exports has been higher than the 7.4 percent targeted, while that in RMG has been vastly below the target of 8.1 percent growth. The decline is attributable to slower growth in export prices and worsening trade logistic bottlenecks. Per the United Nations Economic and Social Commission for Asia and the Pacific (UNESCAP), the price 1 Food imports surged in the latter half of the year as the government drastically cut duties on rice imports in response to crop damages caused by unprecedented floods. 6 growth of Bangladesh’s exports was likely to have declined in 2017 to 3.8 percent from 4.2 percent in 2016. Further in-depth analysis reveals that price dynamics are in play behind the falling growth of import values in the US and the EU markets. In the US, the average price of woven apparels has experienced a secular decline since 2014. According to the Bangladesh Garment Manufacturers and Exporters Association (BGMEA), Bangladeshi garment prices experienced 15 percent cut in last two years in the US market. Some US brands and retailers substantially reduced work orders because of criticism from customer groups for sourcing their products from Bangladesh on grounds of non-compliance with labor standards. Similarly, in the EU, the trend has been the same for the dominant knitwear item. The volume-driven nature of export earnings performance (as against a price-driven one) becomes apparent from these key markets.2 Little progress on export diversification of both products and markets. RMG exports have continued to hover around 80 percent of total exports, but its growth has slowed in recent years, which in turn has slowed the growth of total exports Figure 4: Export Growth (%) (Figure 4).3 The only exception was 30.0 sweaters, which grew by 5.6 percent. 25.0 Bangladesh also suffers from a lack of market diversification. Nearly 75 20.0 percent of Bangladesh’s exports are 15.0 concentrated within the traditional 10.0 markets of the United States (US), European Union (EU)4 and Canada. 5.0 Within these markets, the share of 0.0 RMG is even higher at nearly 90 FY12 FY13 FY14 FY15 FY16 FY17 percent. In FY17, domestic uncertainty within these markets Exports RMG significantly hurt Bangladeshi Source: Bangladesh Bank and EPB exports. In the US (Bangladesh ’s single largest export market accounting for 16.8 percent of total exports) exports declined by 6 percent, while it declined by 14.6 percent in the United Kingdom (third largest export market accounting for 9.3 percent of total exports). Within the EU, exports grew by 3.5 percent primarily driven by the strong performance of Germany, Italy and France.5 2 Also, the management at the Chittagong port worsened because of container congestion due to equipment shortages and unstable labor and outsourced contractor relations. Bangladesh’s two existing commercial ports. These have increased lead times, which already was a problem confronting Bangladesh. It was reported that the container handling operation had slowed down in June 2017 forcing vessels to overstay from 7 to 10 days against a normal turnaround time of 2 to 3 days at the Chittagong port. Chittagong and Mongla, together handle trade estimated at $60 billion per annum. Chittagong is the main port handling 98 percent of the country’s container cargo (1.8m teu per annum) and 92 percent of the total cargo volume which includes 30m tons of bulk cargo per annum. The current rate of cargo growth at Chittagong is estimated at 15 percent per annum. It is expected that available capacity at the port will be exhausted as early as 2018. So, in addition to there being a deep-water port requirement, there is also a looming new capacity requirement. Deep water is required to offer the lower freight rate costs that come with bigger ships and capacity has to be added because existing capacity is fast running out. Bangladesh has not added any new port since independence in 1971. 3 Within RMG, the top five items making up more than 74 percent of total RMG exports experienced a decline.. 4 As may be recalled, in the EU market, export performance of Bangladesh received a boost in 2012 due to the relaxation of rules of origin (RoO) requirement from two stage to single-stage processing. Whilst the initial boost this has given Bangladesh has gradually tapered off, Bangladesh appears to be benefitting from the comparative advantage originating from the favorable RoO for woven RMG items. 5 These three countries account for 15.7, 4.2 and 5.4 percent of total exports respectively. 7 Bangladesh could not reap fully the growth dividends from falling global commodity prices. Bangladesh’s terms of trade (ToT) has been showing a secularly declining trend since the new base was established (FY2005-06). Despite the 52.1 percent decrease in the price of crude oil since its peak in 2014, one of the major import components, Bangladesh’s terms of trade declined by 13 percent since FY06 and remained nearly unchanged since FY13. Overall, average export-weighted prices of Bangladesh could not keep up with average import-weighted price of Bangladesh, leading to decline and subsequent stability in ToT. Remittances remain stressed. Officially recorded remittances declined for the second consecutive year to reach US$ 12.7 billion. The decline in FY17, at 14.5 percent, was much more pronounced than the 2.5 Figure 5: Remittances Growth (%) decline in FY16. Bangladesh 30.0 relies heavily on the GCC 20.0 countries for remittance earnings, which together account for nearly 10.0 60 percent of total remittances. 0.0 Performance in those countries FY12 FY13 FY14 FY15 FY16 FY17 strongly reflect the overall trends -10.0 in remittances (Figure 5). Barring -20.0 Qatar, from where remittances -30.0 grew by 33.5 percent, there was a Total Total (GCC) severe fall in remittances from -40.0 Saudi Arabia, UAE and Bahrain. Source: Bangladesh Bank Kuwait, which is also a large market for expatriate Bangladeshis, saw a moderate decline of 0.4 percent. The fall in remittance is a global phenomenon. Remittance flows to developing countries are estimated to have declined by 2.4 percent, to $429 billion in 2016, after a decline of 1 percent in 2015.6 However, the depth and consistency in the fall of remittances has been particularly severe for Bangladesh and India when compared to other countries such as Pakistan and Sri Lanka. The decline in remittances from GCC countries can be mainly attributed to the decline in oil prices. Additionally, the GCC countries have also introduced fiscal measures, such as a tax on non-nationals, energy price increase and subsidy rationalization, which increased the cost of living for the expatriate workers.7 Remittances to Bangladesh have declined despite an increasing stock of workers abroad. Migrant outflows to GCC countries increased by 54 percent. During FY17, a total of 751,410 expatriate Bangladeshis went to GCC countries, accounting for 84 percent of total migrant outflows for the year. Over 50 percent of this population went to Saudi Arabia, followed by Oman and Qatar. The UAE, Malaysia and Singapore, which were the more traditional destinations for Bangladeshi workers, have continued to decline. Although no reliable data is available on return migrants, net migration has also been quite high. Approximately a fourth of the new migrants were women, with low-paying jobs, only partially explains falling remittances despite the rising stock of Bangladeshi workers abroad. 6 Work Bank, Migration and Development Brief, 27, April 2017. 7 For a more detailed analysis of the factors underlying the remittance decline, see World Bank, Bangladesh Development Update, May 2017. 8 Table 2: Accounting for Remittance Decline US$ in million % of Total % of Total Sources FY16 Gross FY17 Gross Decline Decline GCC -606.1 80.7 -1382.0 55.7 KSA -385.1 51.3 -692.9 27.9 U.A.E. -109.3 14.5 -621.4 25.1 Kuwait -40.2 5.4 -4.5 0.2 Oman -3.8 0.5 -13.8 0.6 Bahrain -67.8 9.0 -49.4 2.0 Others -145.0 19.3 -1097.9 44.3 UK … … -54.0 2.2 USA … … -725.0 29.2 Libya -33.4 4.5 -10.1 0.4 Singapore -54.2 7.2 -88.2 3.6 Iran … … -0.2 0.0 Malaysia -57.4 7.6 -220.6 8.9 Total Gross -751.1 100.0 -2479.9 100.0 Decline Increases 365.4 318.2 o/w Qatar 121.5 144.5 UK 57.0 … USA 25.5 … Germany 5.0 5.6 Iran 0.0 … Japan 6.4 0.3 Others 150.1 167.9 Net decline -385.7 -2161.7 Source: WB staff estimation based on Bangladesh Bank data There has been significant diversion to informal channels. Bangladesh Bank’s field investigation to identify the reasons for the decline in officially recorded remittances indicate that a significant part of the fall may be explained by a substitution between formal and informal channels of money transfers, particularly from the Middle East, Singapore, Malaysia and the US. Note that the size of decline in remittances from the US was the largest, compared with any other single source country (Table-2). Many migrant workers are sending money through intermediaries who are taking advantage of mobile platforms and various software applications. A BBS survey revealed that there has been a significant shift away from banking to mobile banking and hundi channels in 2016 relative to 2013.8 Some of the reasons behind these trends are higher exchange rate margins, quicker transaction processing, convenient access, and lower service fees compared to the banks in host countries. These are lowering the costs of sending remittances back to Bangladesh. In addition, de-risking by banks has made remittances through banking channels more difficult. 8 The proportion of expatriate workers sending through banks decreased from 67.3 percent in 2013 to 50.7 percent in 2016 and the proportion sending through mobile financial services increased from none in 2013 to 14.3 percent in 2016. See BBS, Report of the Survey on Investment from Remittance (SIR) 2016, June 2016. 9 Bangladesh continues to be one of the largest recipient of remittances in the world. Large declines notwithstanding, annual remittances remain several times the combined aid and FDI flows. Remittances have been making an important contribution to the balance of payments by helping finance the trade, services and income account deficits. Remittances growth had been resilient to external shocks such as the global financial crisis of 2008-2009, economic slowdown in advanced economies, and the initial decline in oil prices in 2014. While not a macro concern currently, given robust capital inflows and a still comfortable $3.2 billion surplus in the overall balance of payments, it has serious implications for families, particularly in the rural areas, that depend on remittances. Declining remittances may assume significance at the macro level if the current account deficit persists and official and private capital flows reverse at some point. Assessment of Official Growth Estimates The official preliminary growth estimates appear to be somewhat overstated. On the demand side, a large contribution of “statistical discrepancy” remains a major anomaly, particularly since total investment is also likely to hav e been overestimated. Additionally, the high frequency indicators do not exhibit any sign of an economy achieving its highest ever rate of growth in recent memory. That said, there is convincing evidence that growth has remained healthy by contemporary international standards. Table 3: High Frequency Indicators (%) FY17 Same period FY16 NBR Tax Revenue growth, July-April 19.6 15.7 ADP implementation, July-May (% of original) 63.8 60.8 Industrial raw materials import growth, July-June LC Opening 5.3 4.2 LC Settlement 3.5 3.2 Growth in import of construction materials, July-June LC Opening 10.1 -3.3 LC Settlement -0.5 5.7 Growth in import of capital machinery, July-June LC Opening 10.5 10.3 LC Settlement 37.4 14.1 Growth in quantum index, Manufacturing July-February 8.8 11.3 Remittances growth, July-June -14.5 -2.5 Credit flow to private sector, July-June 15.7 16.8 Exports, July-June 1.7 9.8 Sources: Bangladesh Bank, IMED, NBR, and EPB This assessment is based on several factors. On the demand side, statistical discrepancy accounts for 2.03 percentage points out of the 7.24 percent growth estimated for FY17, constituting over 28 percent of total growth. Investment in plant, machinery and transport equipment is estimated at $20.7 billion whereas total imports of capital machinery and machinery for miscellaneous industry (which includes transport) was only $9.5 billion.9 Except cement and steel, Bangladesh does not have any capital goods producing industry worth reckoning. While some high frequency indicators (Table-3) show better performance than last year, the key ones such as exports, remittances, the quantum index of industrial production, and import of 9 Bangladesh Bank, Major Economic Indicators: Monthly Update, August 2017. 10 construction materials do not. In addition, the estimates were made before unseasonal floods struck the haor areas, significantly damaging the standing boro crops (estimated at around 0.8-1 million tons) which could not have been accounted for in the estimation of agricultural value added. Note that the provisional estimate of GDP has been prepared with limited available information, covering half of the fiscal year. The value addition of manufacturing sector has been estimated without full year data which could not have captured the falling growth rate of export earnings later in the year. Public consumption and investment estimates are most likely based on the original budget projections, which are over-estimates. These notwithstanding, the FY17 GDP growth outcome is still likely to have been strong, particularly when compared to global trends. Macroeconomic and Financial Stability Macroeconomic stability has been sustained, but financial stability remained at risk. Nonfood inflation declined, aided by prudent monetary management and weak aggregate demand growth. Lending rates continued to decline, though at a very sluggish pace not commensurate with the size of excess liquidity in the banking system. The banking system remained stressed by high NPLs and concentration of loans. Robust financial account surplus in the balance of payments helped maintain reserve growth. With a major turnaround in the current account balance into $1.5 billion deficit, the exchange rate has depreciated. Fiscal deficit has increased, financed increasingly from expensive domestic sources. Inflation Inflation has declined. The Consumer Price Index (CPI) declined to 5.4 percent in FY17. This was within the Bangladesh Bank’s Monetary Policy Statement (MPS) target of 5.3-5.6 percent 18.0 Figure 6: Inflation rate, y-o-y (%) (Figure-6). The decrease in inflation rate is 16.0 primarily due to a decline in non-food inflation. All components of nonfood inflation slowed, 14.0 except for the ‘national recreation, 12.0 entertainment, education and cultural services’. 10.0 Aggregate demand growth slowed in FY17 due to a large decline in remittances, depressed 8.0 earnings in garments exports and the tapering of 6.0 the impact of public sector pay increases. Monetary restraint also helped. 4.0 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 However, there is no room to be complacent with the current inflationary trends. Bangladesh General Index Food Non-food Bank’s survey shows that inflation expectation for June 2018 is 6 percent. Source: Bangladesh Bureau of Statistics Food inflation, on the other hand, has been increasing. Food inflation averaged slightly over 6 percent for the year in FY17, compared with 4.9 percent in FY16. Rising price of rice has driven the food inflation upwards. Rice accounts for 23 percent in the commodity basket of the CPI. Coarse rice price in June was about 44.7 percent higher than a year ago. Prices of other varieties of rice are also about 15-18 percent higher. Rising food inflation is bane for the poorer consumers who are most affected since (coarse) rice is the single most important commodity in their consumption basket. Rise in food inflation reflects mostly cost push factors. These include rise in tariffs on rice imports as well as production shortfalls due to early floods and blast outbreak and decline in public stocks. Measures taken recently by the government such as reduction of duties, allowing zero-rated LC margin requirements 11 for rice imports and government to government procurement of rice from Vietnam should have helped ease rice prices, but rise in rice prices in India, Thailand and Vietnam partially negated their effects. Monetary Developments Monetary management has remained generally prudent. The Bangladesh Bank (BB) kept the monetary aggregates broadly in line with their programmed paths in the Monetary Policy Statements (MPS) for FY17 (Table-4). The three important anchors of the monetary program - Reserve Money (RM), Broad Money (M2), and domestic credit - grew by 16.3, 10.9 and 11.2 percent in FY17, respectively. Broad Money and domestic credit growth were well below the program ceilings, thus helping achieve the favorable inflation performance in FY17. Credit to the public sector declined by 12 percent, as the government paid off maturing T-bills/T-bonds with proceeds from booming sales of NSCs. Table 4: Monetary Program Performance FY 14 FY 15 FY 16 FY 17 FY 18 Target Actual Target Actual Target Actual Target Actual Target Actual* Net Foreign Assets 10.0 41.2 3.6 18.2 11.1 23.2 10.1 14.4 5.5 12.2 Net Domestic Assets 18.6 10.3 20.2 10.7 16.2 14.2 17.3 9.7 16.7 10.0 Domestic credit 17.8 11.6 17.4 10.0 15.5 14.2 16.4 11.2 15.8 11.6 Public Sector credit 22.9 8.9 25.3 -2.6 18.7 2.6 16.1 -12.0 12.1 -15.3 Private Sector credit 16.5 12.3 15.5 13.2 14.8 16.8 16.5 15.7 16.3 16.9 Broad Money 17.0 16.1 16.5 12.4 15.0 16.3 15.5 10.9 13.9 10.5 Reserve Money 16.2 15.5 15.9 14.3 14.3 30.1 14.0 16.3 12.0 15.6 Inflation (end of 7.0 7.3 6.5 6.4 6.1 5.9 5.3-5.6 5.4 5.5 5.5 period average) Growth 5.8-6.1 6.1 6.5-6.8 6.6 6.8-6.9 7.1 7.2 7.2 7.4 .. Source: Bangladesh Bank and Bangladesh Bureau of Statistics *July, 2017 Private sector credit growth has been healthy. Private sector credit grew by 15.7 percent in FY17 (Figure-7), remaining within the end-June 2017 target of 16.5 percent. A pickup in Figure 7: Private Sector Credit Growth, annual (%) credit growth in the last quarter supported domestic investment and consumption 28.0 demand. Private sector businesses also 25.8 24.9 accessed short- and longer-term foreign 23.0 borrowings to widen their financing envelope. The share of industrial term loans 19.7 16.8 and working capital finance has steadily 18.0 increased. Industry, consumer financing and 14.6 15.7 construction have been the main users of 13.0 13.2 credit intermediated largely by private sector 10.8 banks followed by the state-owned banks. 8.0 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 Public sector bank borrowing declined. The government’s non-bank deficit Source: Bangladesh Bank financing through NSCs in FY17 exceeded the budgetary target by a massive margin (more below). High administered yields, ranging between 11 to 13 percent, on these instruments available on tap attracted most savers, allowing in government’s lower cost bank borrowing being paid off with high-cost NSCs. The Government’s non-bank borrowing has lower 12 inflationary impact than bank borrowing, and leaves greater room for private sector’s bank borrowing . However, it reduces the government’s fiscal space and hinders the much-needed bond market development for mobilizing savings for infrastructure and other long-term investments. Excess liquidity growth slowed. The pickup in credit growth exceeded deposit growth, thus moderating excess liquidity as measured by the ratio of excess of Statutory Liquidity Requirement (SLR) assets to Total Demand and Time Liabilities (TDTL). At around 11.2 percent end-June, 2017, the relative size of "excess of SLR" assets are now back at their 2012 levels.10 Total demand and time deposits grew by 10.6 percent, exceeding the growth in domestic credit by half a percentage point. Call money rates have tended to rise recently. Yet large excess liquidity remains which weakens the monetary policy transmission mechanism. However, the ability of monetary authorities to influence demand conditions in the economy depend on the extent to which bank holdings of excess liquidity exceed levels required for precautionary purposes. BB has taken a passive approach to domestic liquidity management. It has been sterilizing only part of the liquidity from the external inflows. This has kept market interest rates low and short-term real rates negative for some time. Of late, liquidity growth has been partially stunted by falling remittances, but the concern that the sustained low interest rate environment might encourage banks to take excessive risks and loosen lending standards remains. BB should increase its sterilization efforts, particularly if remittances rebound, through open market operations to head off an abrupt and disruptive tightening which might be needed down the road to contain financial sector risks. The Financial Sector Distress in the banking sector continues. The banking sector, which dominates the financial sector in Bangladesh, has continued to struggle. While the sector’s capital adequacy ratio (CAR) is above the 10 percent requirement of the Basel II framework, the overall asset quality deteriorated in 2016. Seven banks failed to maintain the regulatory capital requirement and this problem is acute amongst the State-Owned Banks (SOB). In 2016, the CAR of State-Owned Commercial Banks (SCB) and State Owned Development Banks (SDB) was 5.9 percent and -33.7 percent respectively. The magnitude of their capital shortfall has prompted the government to once again keep a budgetary provision for their recapitalization. Asset quality has deteriorated. The gross non-performing loan (NPL) ratio increased to 9.2 percent in 2016 from 8.8 percent in 2015 (Figure-8). The Figure 8: NPL as % of Outstanding Loan 30 asset quality of the SCBs continues to remain poor 25 and is the main driver behind the deterioration of 20 the asset quality within the sector. In 2016, the 15 NPL ratio for SCBs increased by 3.6 percentage points whereas it decreased by 0.6 percentage 10 points for Private Commercial Banks (PCB). Since 5 0 Figure 9: Interest Rate Movement 16.0 Jun-14 Jun-15 Jun-16 Sep-14 Sep-15 Sep-16 Dec-13 Dec-14 Dec-15 Dec-16 Mar-14 Mar-15 Mar-16 14.0 12.0 10.0 Total SCBs PCBs 8.0 6.0 2013, the NPL has continued to rise in the SCBs 4.0 which has also been accompanied by a greater 2.0 0.0 concentration of default loans within them. The Oct-13 Oct-14 Oct-15 Oct-16 Jul-13 Apr-14 Jul-14 Apr-15 Jul-15 Apr-16 Jul-16 Jan-14 Jan-15 Jan-16 rise in NPLs as well as the increase in default loans explain the stickiness of the interest rate spread within the banking sector. Despite a decline in both Spread Lending Rate Deposit Rate 10 BB, Monetary Policy Statement, July-December 2017. 13 lending and deposit rates, the interest rate spread has been stagnant at 4.7 percent (Figure 9). Protecting profitability amidst the default loan culture makes banks reluctant to decrease the spread on the interest rate despite holding a high level of liquidity. The absence of good borrowers and a poor legal framework to recover default loans has also been instrumental in the banking sector’s increase in risk aversion. Table 5: Selected Banking Sector Indicators Ratio 2012 2013 2014 2015 2016 ROA 0.6 0.9 0.7 0.8 0.7 ROE 7.8 10.7 8.1 9.4 9.7 Net Interest Margin 2.8 2.1 1.8 1.7 1.9 Interest Income to Total Assets 8.1 7.7 6.9 6.2 5.5 Net Interest Income to Total Assets 2.2 1.7 1.5 1.5 1.5 Non-Interest Income to Total Assets 2.7 2.7 2.8 2.7 2.4 Non-interest expense to Total Income 42 47.1 46.5 48.6 53.3 Capital Adequacy Ratio 10.5 11.5 11.4 10.8 10.8 Classified Loans to Total Loans 10 8.9 9.7 8.8 9.2 Classified Loans to Capital 74.2 59.8 67.7 60.8 74.2 Provision to Classified Loans 44.4 61.6 56.2 51.8 49.4 Source: Financial Stability Report 2016, Bangladesh Bank Overall profitability increased. The banking sector profitability increased by 4.9 percent in 2016. It was mainly driven by the strong performance of the PCBs and Foreign Commercial Banks (FCB). Profits of PCBs rose by nearly 17 percent in 2016. The overall industry profitability was brought down by the SCBs with Sonali Bank and Rupali Bank making significant losses. Janata Bank’s profit in 2016 declined by 48 percent, while the profit of Agrani Bank increased by 9.7 percent. As shown in Table 5, the improved profitability helped the Banks to maintain their Return on Assets (ROA) and marginally improve their Return on Equity (ROE). By managing the interest rate spread, the banks were also able to improve their net interest margin. However, their operating expenses increased significantly from 2015. The increase in operating expenses was also more pronounced for the SCBs. Barring Janata Bank, all the other SCBs crossed the operating expense threshold set by the Bangladesh Bank. While, the implicit government guarantee on the deposits of the SCBs limits their systemic threat to the overall financial sector, but their poor performance, poses a fiscal risk to the government and is also an impediment to a modernized financial sector. The increase in profitability of the PCBs highlights the improved performance of the PCBs over the last year, but recent amendments to the Bank Companies Act and potential changes to the single borrower exposure limit may open the PCBs to unwarranted risks. While these amendments are being contemplated by policymakers and Bangladesh Bank, no reform initiatives have been taken to improve management structure, board appointments, financial reporting and credit growth limits guidelines of the SCBs. Capital market has been bullish. The general index of the Dhaka Stock Exchange (DSE) ended the fiscal year with a 25 percent gain over the previous fiscal year. There was some volatility in the stock prices during January and February (Figure 10) mainly due to the healthy earnings reports of the Banking and Non-Banking sectors. As highlighted above, the private banks (most of whom are listed in the Dhaka Stock Exchange) had improved their profitability in 2016 and being the largest sector in the exchange, they experienced a surge in investors interests. The market Price-to-Earnings (PE) ratio stabilized to 15.7 after reaching nearly 16.4 in March. It subsequently rose to 17.8 in mid-September. Notwithstanding the moderate gains over the last year, it is quite evident that complete confidence has not returned to the capital market. Furthermore, the government has also been slow to progress on implementing the Capital Market Development Master Plan which was drawn up after 2011 stock market crash. The government has made progress in improving the function and regulation of capital markets. But the rules and regulations 14 pertaining to capital markets including addressing the slow court system, tax distortions and legal impediments to corporate bond issuance and coordination among regulatory bodies leave a lot to be desired. Booming National Savings Certificates (NSC) sales. The government has continued to rely on sales of the NSCs to finance its budget deficit. This has Figure 10: Capital Market Trends limited the opportunity for the government to 7000 4000 issue long term treasury bonds which would have 3500 DSE General Index 6000 helped develop a more liquid market for 3000 BDT (Billion) 5000 government securities. The treasury bonds also 2500 4000 2000 provide a benchmark to price corporate bonds as 3000 1500 well. However, by maintaining an interest rate 2000 1000 well above the market interest rate (nearly 4 1000 500 percentage points higher than the bank deposit 0 0 rates), small and retail investors have flocked to Oct Nov Aug Sept Jan Apr Feb July Mar May Jun Dec the NSCs and their net sale increased by 40 percent in FY17. It also exceeded the budget Market Capitalization (RHS) General Index/ DSE Broad Index target of Tk 190 billion by around 240 percent (Figure-11). The substantial growth in NSC not only has implication for the development of a robust capital market, but it also means that the government’s interest burden will increase despite a stable debt to GDP ratio. Policies that develop the country’s capital Figure 11: Net Sale of NSC markets for financing long-term private investment would greatly improve future FY 17 (UPTO MAY) 469.6 growth prospects. Increasing reliance on FY 16 336.8 high-cost National Savings Certificates as a financing vehicle for the government budget FY 15 287.32 impedes the development of a deep and liquid FY 14 117.1 market for government securities. NSCs may FY 13 7.72 be playing an important social role by FY 12 4.79 providing support to vulnerable segments of the population in the absence of 0 200 400 600 unemployment insurance and wide pension Billion Taka coverage. This makes the outright elimination of NSCs very difficult. At the same time, it is also recognized that excessive reliance on NSCs for budget financing not only impedes capital market development but also hampers monetary policy management. NSCs are currently poorly targeted and misuse of the system is increasing. To combat this, the government is striving to improve monitoring to better understand who is benefiting from NSCs. Aligning NSCs rates with market interest rates could also contain the distortionary impact of NSC on the functioning of financial markets. Consideration could be given to better targeted and less costly alternatives that achieve the government’s social policy goals without distorting financial markets. Balance of Payments and the Exchange Rate Trade and services deficits have ballooned. The external position remained robust as reflected in adequate reserve levels and current account surpluses until FY17 (Table-5). A steady global market share suggests that the country’s exports have remained competitive. However, in FY17, the external sector dynamics changed rather dramatically as export growth declined, remittances plummeted and import growth increased. The trade deficit increased from $6.5 billion in FY16 to $9.5 billion in FY17 while deficit in the services account increased from $2.7 billion to $3.3 billion. With 14.5 percent decline in remittances, 15 the current account balance turned negative for the first time over the last five years and stood at US$ 1.5 billion deficit at the end of June, 2017 as against US$ 4.3 billion surplus in June 2016. Table 6: Selected Balance of Payments Indicators US$ million Items FY13 FY14 FY15 FY16 FY17 Trade balance -7009 -6794 -6965 -6460 -9472 Merchandise export f.o.b. (inc. EPZ) 26567 29777 30697 33441 34019 Merchandise import f.o.b. (inc. EPZ) -33576 -36571 -37662 -39901 -43491 Services (net) -3162 -4099 -3186 -2708 -3284 Income (net) -2369 -2635 -2869 -1915 -2007 Workers' remittance 14338 14116 15170 14717 12591 Current Account Balance 2388 1402 2875 4262 -1480 Capital account (net) 629 645 496 464 314 Financial account 2863 2686 1925 944 4179 o/w Foreign direct investment (net) 1726 1432 1830 1285 1706 MLT loans (excludes suppliers credit) 2085 2277 2472 3033 3174 Other short term loans (net) -100 -838 -105 -435 992 Trade Credit (net) -250 -340 -2508 -2101 -1185 Errors and omissions -752 750 -923 -634 156 Overall Balance 5128 5483 4373 5050 3169 % of GDP Items FY13 FY14 FY15 FY16 FY17 Trade balance -4.05 -3.93 -3.57 -2.92 -3.81 Merchandise export f.o.b. (inc. EPZ) 17.71 17.22 15.73 15.10 13.68 Merchandise import f.o.b. (inc. EPZ) -22.38 -21.15 -19.30 -18.02 -17.48 Services (net) -2.11 -2.37 -1.63 -1.22 -1.32 Income (net) -1.58 -1.52 -1.47 -0.86 -0.81 Workers' remittance 9.56 8.16 7.77 6.65 5.06 Current Account Balance 1.59 0.81 1.47 1.93 -0.59 Capital account (net) 0.42 0.37 0.25 0.21 0.13 Financial account 1.91 1.55 0.99 0.43 1.68 o/w Foreign direct investment (net) 1.15 0.83 0.94 0.58 0.69 MLT loans (excludes suppliers credit) 1.39 1.32 1.27 1.37 1.28 Other short term loans (net) -0.07 -0.48 -0.05 -0.20 0.40 Trade Credit (net) -0.17 -0.20 -1.29 -0.95 -0.48 Errors and omissions -0.50 0.43 -0.47 -0.29 0.06 Overall Balance 3.42 3.17 2.24 2.28 1.27 Source: Bangladesh Bank Reserves growth slackened. Rapid growth in garment exports and remittances have dominated the balance of payments over the last several years raising reserves to around eight months of merchandize imports. The accompanying productivity growth has also allowed for 6.5 percent appreciation of the real exchange rate in 2016 (Figure-12). Despite large current account deficit, the overall balance of payment surplus was 16 still a sizable $3.2 billion in FY17 due to Figure 12: Real Effective Exchange Rate continuing growth in capital account flows, 140 particularly FDI, other short term loans and 130 MLT disbursements. 120 Reserve adequacy cannot be taken for granted. Foreign exchange reserves, whilst 110 robust (Figure-13), could come under 100 pressure if current account flows continue to remain weak and debt servicing liabilities of 90 various types rise. Bangladesh Bank needs to monitor closely liabilities originating from loans taken by the private sector. A Source: IMF conservative stance may be appropriate in response to demands for partial capital 9.0 account convertibility to allow Bangladeshi 37.0 Figure 13: Foreign Exchange Reserves investors to invest abroad. The government 8.0 7.8 8.0 decision to not move forward on a proposal to 32.0 33.6 30.1 7.0 create a “sovereign wealth fund” that would 27.0 25.0 make the central bank’s reserves available to 22.0 5.5 6.0 finance large infrastructure investment 5.0 projects is welcome. If this fund were to be 17.0 15.3 launched, it could have encumbered reserves 12.0 4.0 in a way that could harm external resilience or FY13 FY14 FY15 FY16 FY17 FY18 (Jul-Aug) hampered the country’s ability to tap global Foreign Exchange Reserves - end of period (billion capital markets when called for in the future. US$) The Bangladesh economy will continue to Source: Bangladesh Bank remain exposed to global uncertainties and external shocks. It is therefore essential that exchange rate management maintains the country’s foreign exchange reserves sufficient to ensure the economy’s resilience. The foreign exchange Figure 14: Inter-bank and Informal Exchange Rate market demonstrated 84.0 83.5 greater flexibility recently. Indian 83.1 The exchange rate against 83.0 Demonetization, USD became a little volatile 8th Nov with relatively sharp 82.0 82.3 81.1 81.7 depreciation in the informal 81.5 81.0 as well as the interbank 80.7 market (Figure-14), inducing 80.0 80.0 the central bank to intervene. The nominal exchange rate 79.0 78.4 78.7 slid a bit as the taka 78.0 depreciated by over 2 percent in the last quarter of 77.0 FY17. In the third quarter of 10-Jul 29-Aug 18-Oct 7-Dec 26-Jan 17-Mar 6-May 25-Jun 14-Aug FY17, exchange rate Weighted avg. Inter-bank rate Mid Informal rate experienced some volatility. Source: Bangladesh Bank The Bills for Collection (BC) selling rate spiked in April 2017. Bangladesh Bank intervened by introducing a cap of Tk 2 on deviation of the average BC selling rate from the inter-bank exchange rate. This short period of volatility was attributed 17 to the cumulative pressure originating from the rise in L/C settlement, higher demand for foreign loan repayments and declining remittance flow through the banking channels. However, BB did allow the interbank rate to creep up, allowing it greater flexibility to adjust to excess demand pressures emerging from the rise in current account deficit. Fiscal Outturns Fiscal deficit has increased. As expected, revenues fell well short of budget target in FY17. NBR revenue growth target of 38.9 percent, set in the FY17 Budget, compared to the actual collection in FY17 was highly ambitious. Growth target in the revised budget was reduced to26 percent, driven by growth in indirect tax revenue collection, particularly VAT and supplementary duties. The tax-GDP ratio increased from 8.8 percent in FY16 to at best 9.1 percent in FY17, still significantly below countries at a comparable level of development. Current expenditure has been increasing due to increases in subsidy and transfer as well as pay and allowances. Total expenditure was short of budget target as well, but unlike in previous years, expenditure shortfall relative to budget was equal to the revenue shortfall as percentage of GDP. Consequently, the revised budget deficit was exactly as envisaged in the original budget—5 percent of GDP (Table-7). Table 7: Fiscal Outcomes Taka in billion FY 17 FY 13 FY 14 FY 15 FY 16 (Revised Budget) Total Revenue 1281.3 1403.8 1459.7 1729.5 2185.0 Total Expenditure 1745.4 1882.1 2043.8 2384.3 3171.7 Overall balance -464.1 -478.3 -584.2 -654.8 -986.7 External Financing 126.9 97.1 72.3 147.4 287.7 Domestic Financing 331.9 381.4 511.7 507.3 699.0 o/w Bank 274.6 181.7 5.1 106.1 239.0 o/w Non-Bank 57.3 199.7 506.6 401.2 460.0 % of GDP Total Revenue 9.5 10.4 9.6 10.0 11.2 Total Expenditure 14.6 14.0 13.5 13.8 16.2 Overall balance -3.9 -3.6 -3.9 -3.8 -5.0 External Financing 1.1 0.7 0.5 0.9 1.5 Domestic Financing 2.8 2.8 3.4 2.9 3.6 o/w Bank 2.3 1.4 0.0 0.6 1.2 o/w Non-Bank 0.5 1.5 3.3 2.3 2.4 Source: Ministry of Finance Tax revenue base remains narrow. Top ten taxpayers paid 78.5 percent of the total VAT collected by the Large Taxpayers Unit in FY17. Of the total collected by LTU, 50 percent came from one tobacco company alone. The number of companies under the VAT LTU has in fact decreased in recent years. There remains a large unrealized potential of increasing VAT collection from the existing registered companies. The amount of VAT collected but not paid was Tk 17 billion in 35 cases.11 The good news is that the number of income-tax returns filed by individual taxpayers increased from 1 million to 1.55 million in FY17 due to 11 LTU milks most VAT from ten payers, misses out on vast potential, The Financial Express, June 2, 2017. 18 mandatory submission of tax returns by government officials having monthly salary above Tk 16,000. In the current fiscal year, private sector executives and officials in managerial positions are required to submit tax returns or else their employers will be held to account. The pace of ADP implementation improved somewhat: ADP implementation was 63.8 percent during July-May of FY17, compared with 60.8 percent implementation during the same period of FY16. The recovery was driven by higher expenditure of local resources. Utilization of aided projects was lowest in last five years. The pace of implementation of some of the fast track projects have been largely on track. However, implementation of deep sea port projects at both Paira and Sonadia appears to have stalled. Slow pace of progress of these mega projects will likely result in higher cost. The composition of deficit finance has tilted further towards domestic sources. Domestic financing of deficit increased from 2.9 percent of GDP in FY16 to an estimated 3.8 percent in FY17 and exceeded the FY17 original budget target by 0.7 percentage point of GDP. The government repaid Tk 325.9 billion to the banking system while borrowing Tk 475.2 billion from nonbank sources, almost all from the sale of the NSCs. The public debt as percent of GDP has been declining steadily in recent years, but the rapidly shifting composition of deficit financing towards expensive sources coupled with rising level of deficit could easily reverse this trend in the near term. Structural Reforms The pace of structural reforms has slowed considerably over the last year. The government made moderate progress on the large infrastructure projects, while at the same time back-tracked on key reforms in taxation and the financial sector. With elections stated for the middle of FY19, it is highly likely that the government’s priority over t he next two fiscal years would be the completion of the big-ticket infrastructure projects and avoiding any sensitive structural reforms. Financial Sector: Reforms to curb the rise in Non-Performing Loans continues to elude the financial sector. The change to the Bank Companies Act during the early part of the year can further weaken the corporate governance structure within the banking sector. The Ministry of Finance has decided to establish a Financial Stability Council (FSC) to deal with crises in the financial sector including banks and financial institutions (FIs). The major role of the proposed FSC would be assisting systemic troubled banks and FIs, management of financial sector stability, improvement of resolution regime for financial institutions; and designing of macroprudential regulations and instruments. The new FSC would include representatives of all the financial sector regulators like Ministry of Finance, Bangladesh Bank, Bangladesh Security and Exchange Commission (BSEC), Microcredit Regulatory Authority (MRA), Insurance Development and Regulatory Authority (IDRA) and other relevant government agencies such as National Board of Revenue (NBR). The proposed FSC would be led by the Finance Minister. Countries such as India and the United States of America had setup similar councils in the aftermath of the Global Financial Crisis of 2008. While the exact terms of reference of the council has yet to be determined, the structure being reported for Bangladesh is like the one in India. Considering the excess liquidity in the banking sector and the rise in per capita income in Bangladesh, BB has also revised the upper ceiling of personal credit cards and loans. Under the revised guidelines unsecured limit has been doubled for both the sectors to Tk 1 million and Tk 2 million. Bangladesh Bank has also revised the maximum interest rate that banks will be allowed to charge for credit card holders. Under the new guidelines, the interest rate on the outstanding amount of credit cards shall not exceed 5 percent of the highest interest rate offered on any credits of the bank. 19 Trade and Investment: Bangladesh has attempted to move forward with an ambitious program to improve its rankings in the Doing Business Index and increase the flow of FDI. Initiatives have also been taken to improve trade arrangements with other developing countries. Bangladesh ranked 176 amongst 188 countries in the latest Doing Business Index. To enhance Bangladesh’s ranking, the cabinet has approved ‘One-stop Service Act, 2017’. This law would facilitate and expedite domestic and foreign investors in getting 16 types of services. These include the issuance of trade license, land registration and mutation, environmental clearance, construction permit, connections of power, gas and water, telephone and internet, explosive license and boiler certificate. Four organizations under the Prime Minister’s Office namely, Bangladesh Investment Development Authority (BIDA), Bangladesh Economic Zone Authority (BEZA), Bangladesh Export Processing Zone Authority (BEPZA) and Bangladesh Hi-tech Park Authority, would act as the 'Central One-stop Service Authority’ in their respective areas. To facilitate trade with India, Bangladesh has taken on a program to improve the infrastructure of three land ports. The development of these land ports will help to ease the pressure on Benapole which remains the single largest land port in the country. The government has also decided to keep both the Benapole land port as well as the Chittagong sea port open 24 hours a day and seven days’ a week. There has been growing concern over the congestion at these two crucial ports and this is an attempt to facilitate faster clearance of both export and import commodities. The government approved a proposal for the ratification of the Preferential Trade Agreement (PTA) signed among eight Muslim countries of the D-8 alliance. The eight countries comprising the Developing-8 (D-8) are Egypt, Turkey, Iran, Bangladesh, Pakistan, Indonesia, Malaysia, and Nigeria. Bangladesh had not ratified the agreement signed in 2006 due to a dispute over the value addition criterion. Apart from Bangladesh, the other members of the bloc decided that at least 40 percent local value addition will be required to enjoy preferential tariffs for goods of member-states under the treaty. Bangladesh, being a least developed country or LDC, demanded the tariff preference for its goods against 30 percent local value addition in the rules of origin (RoO) in the intra-forum trade. The D-8 PTA came into force for Iran, Pakistan, Malaysia, Indonesia, Nigeria and Turkey from last year. Infrastructure: Limited progress across all major infrastructure projects. While government had planned to complete at least three mega infrastructure projects by the end of its current tenure, all projects are now lagging far behind their schedule barring the Padma Bridge project. Padma Bridge project has reportedly made significant progress with about 45 percent of work already being completed and is expected to be operational by December 2018. The progress of the phase-1 of the Metro Rail project has been slow with only 4 percent of the work being completed. The project got delayed after the Holey Artisan terrorist attack last year. The project is being funded by JICA. Another JICA project, the Matabari Coal power plant, has also seen delays and only 1 percent of the work has been completed. Similarly, there has been limited progress with the coal fired Rampal Power Plant where only the land development work has been completed. The construction work of the country’s first nuclear power plant will start from September this year after the government completed all the financing agreement with the Russian Federation. The plant will be entirely financed through a Russian line of credit worth US$ 11.3 billion with a repayment period of 20 years. The Bangladesh Telecommunication Regulatory Commission (BTRC) has finalized the guidelines for the upcoming 4G spectrum auction. BTRC is also expected to approve technology neutrality for all existing spectrum, which operators have been calling for and some are already prepared to upgrade their networks to 4G. The telecom operators want the technology neutrality to be implemented beforehand, rather than announcing 4G auction to ensure quality services. Introduction of 4G services will complement the government’s Digital Bangladesh agenda and will also play a crucial role in realizing the government’s non-tax revenue target for FY18. 20 Energy: Bangladesh diversifies into LNG. The government has given approval to build three floating LNG terminals. The terminals would be in Cox’s Bazaar which has an ideal infrastructure for the setup of an LNG terminal. All floating terminals would have daily generation capacities of 500 million cubic feet per day (MMCFD). Reliance of India, Manjala Power Limited of Hong Kong and a joint venture between US based Excelerate Energy and local Summit Group will build the three terminals. To complement the development of the floating terminals, the government has also planned to blend the imported re-gasified LNG (R-LNG) with locally produced gas before supplying to consumers. Natural gas supply is set to increase by around 1,000 million cubic feet per day (mmcfd) from 2018 due to this initiative. 500 mmcfd of the imported LNG will be added to the national gas grid by the first half of 2018, while another 500 mmcfd in the second half. This would help to address the natural gas shortage in Bangladesh. Overall Progress in the Labor Market Leveraging labor – the most important asset of the poor – to generate an earnings stream is the most sustainable way out of poverty for individuals and households. A multi-sectoral Jobs Diagnostic jointly conducted by the World Bank and Bangladesh Bureau of Statistics (BBS) recently assessed the supply and demand sides of Bangladesh’s labor market in terms of job creation, quality, and inclusiveness. The diagnostic used multiple sources of data including the Economic Census and various years of Labor Force Surveys (LFS) during the period between 2003 and 2016, and provided a comprehensive analysis of the economy with the jobs lens. The analysis documented impressive developments over the past decade, but also highlighted several entrenched and emerging challenges in the labor market that will require concerted efforts for policy and institutional intervention. Economic growth, along with a favorable demographic transition, has translated into substantial progress in jobs outcomes (Figure 15). Between 2003 and 2016 the conomy generated more than 1.15 million net jobs per year, on Figure 15: Summary of key labor market developments: annual average, among the working age growth (2003-2016) (15-64) population, with overall employment growing 2.4 percent annually. The total level of employment growth was above the growth of the working age population, leading to an increase in the employment ratio. Moreover, employment outside of the agricultural sector grew substantially faster (3.7 percent), and waged employment grew by 5.7 percent annually, driven in particular by large-scale job creation in manufacturing, mostly in urban areas. This contributed to female employment increasing by Data source: LFS in 2003 and 2016 4.4 percent annually, more than twice the rate of growth of the working age population, bringing millions of women into the labor force and increasing female labor force participation. Along with 21 employment growth also came strong income growth, with real wages among paid employees rising 4.9 percent annually over this period Trade integration, through exports in the ready-made garments (RMG) sector, has been a critical catalyst of job-creating industrialization and urbanization. The export-oriented RMG sector, based mostly in mega-cities such as Dhaka and Chittagong, has grown rapidly and contributed to large-scale job creation during the 2000s. Data on trades show that exports, 89 percent of which come from the RMG sector, grew by more than 16 percent annually between 2003 and 2015 (double that global average rate), contributing to a tripling of the export share of GDP over that period (Figure 16, left). Thus, jobs in the RMG expanded from 600,000 in 2003 to over 3.2 million by 2010. Driven by RMG’s performance, the manufacturing sector accounted for more than one-quarter of net employment between 2003 and 2016. Figure 16: Export Growth: 2003-2015 (left); remittances as a share of GDP and growth in remittances (right) Data source: UN Comtrade via WITS Despite impressive labor market performance with steady structural transformation and robust productivity growth, there are multiple challenges that require policy attention. The pace of job creation has fallen sharply in recent years. Employment grew at a rapid annual rate of 3.1 percent in 2003-10, allowing for lower unemployment and higher labor force participation. But these trends were reversed in 2010-16, with jobs growth falling to just 1.8 percent annually (Figure 17). This slowdown in employment in 2010-16 took place despite accelerated economic growth (annual per capita growth rate at 5.2 percent in 2010-16 compared to 4.5 percent in 2003-10). One major factor contributing to the slowdown was stagnating jobs growth in the RMG sector, with the average number of jobs added per year in the RMG and textiles sectors declining from over 300,000 in 2003-10 to only around 60,000 since 2010 (Figure 18). This slowdown in jobs growth in RMG sector is likely to have contributed to the stagnating female labor force participation (LFP) rate since 2010. 22 Figure 17: GDP per capita and employment Figure 18: RMG sector employment (1000s) and annual growth rates, 2003-16 female LFP rates, 2006-16 (percent) Data source: Labor Force Survey 2003, 2005, 2010, 2016 Slowdown in the RMG sector underscores the need to develop a more diversified export sector. While other manufacturing sectors are growing rapidly to meet the increasing domestic demand, export oriented sectors beyond RMG need to emerge to create quality jobs on a large scale. Sectors like footwear, leather products, and pharmaceuticals have improved their export performance and shown potential for growth, but have not been emerging quickly enough as a source of exports and job creation. This is in part due to an investment policy environment that favors established sectors like RMG, underscoring the need to enhance competitiveness of sectors beyond RMG. Sluggish enterprise growth and a high share of microenterprises highlights the need to support an Figure 19: Distribution of economic units, by type environment that facilitates Small and Medium Permanent - Household Enterprises (SMEs) growth and job creation. larger firms enterprises, Despite the prominence of large-scale manufacturing in (L>10), 2% 36% the RMG sector, permanent microenterprises, along with household enterprises and temporary establishments, account for 98 percent of all economic units in the country and half of all jobs (Figure 19). Most microenterprises exist to offer subsistence earnings in the absence of formal, wage jobs, and are not positioned for growth. Thus, Bangladeshi firms tend to be micro and old, failing to either grow or exit. What is missing is growth and job creation from small and Permanent - Temporary mid-sized enterprises. Both regulatory barriers and microenterprises establishments, (L<10), 56% 6% access to finance constrain the ability of micro- enterprises to improve earnings and to grow. Job creation prospects also depend on addressing major urban infrastructure gaps. While Dhaka division is now home to around 30 percent of Bangladesh’s population, it accounts for 45 percent of all industry jobs and 37 percent of all services jobs. Congestion is becoming a major constraint to firm productivity and expansion, and firms are forced to shift to the urban periphery. This is clear from the declining urban share of firms, especially large ones. New investments and expansions in all parts of the country (but especially Dhaka) are constrained by lack of access to land. Yet outside Dhaka (and to some degree Chittagong), second-tier cities are not emerging as alternative locations for industrial investment. This is due to similar land constraints, but also to shortfalls in the critical physical infrastructure such as transport and electricity, and to gaps in healthcare and education service delivery, which act as barriers to 23 attracting skilled workers. Improved infrastructure in cities would likely increase incentives to migrate from rural to urban areas, which can facilitate access to formal wage employment. In addition to job creation, significant improvement in the quality of jobs must be a high priority. Substantial shares of workers are engaged in informal, unpaid, or agricultural work -- Only 22 percent of male and 20 percent of female workers are wage employees and agriculture is still the largest sector with respect to employment. A higher share of working females are employed in agriculture than men, while women’s presence in services is far less than men (Figure 20). The share of unpaid workers, close to 40 percent for women and 5 percent for men, also highlights the gender discrepancy in job quality, although women are far less likely to work as day laborers. Informality, even among wage employees, is also commonplace, with less than 40 percent of wage employees having a written contract, let alone access to social insurance such as pensions. Significant gender gaps remain in LFP, employment status, as well sector of work and occupation, with a higher gender gap in LFP in urban areas but a larger gap in access to wage employment in rural areas. Figure 20: Distribution of employment sector and status by gender in 2016 Source: LFS 2016 24 Low levels of technology outdated management practices, and lagging skills of the workforce especially among microenterprises, perpetuate the creation of low quality jobs. Firms tend to lack knowledge and technology for competitiveness, but face financial constraints to make investments in productivity-enhancing technology and practices. Moreover, despite rapid increases in formal education, particularly for females, the Bangladeshi work force, has limited opportunities to develop labor market relevant skills. The result is that most workers are stuck in low productivity jobs, while high productivity industries struggle to find competent employees, particularly in technical and management levels, and often outsource foreign workers. In the midst of slowing job creation and low quality of jobs, access to jobs for vulnerable groups is becoming increasing challenging, threatening inclusiveness of the labor market. In recent years, youth unemployment rates, particularly for females, have spiked while those of older adults remain relatively stable, suggesting that youth may be disproportionally affected by the pressures associated with the recent slow-down in job creation (Figure 21). Poorly functioning Technical and Vocational Education and Training (TVET) systems and lack of intermediation or employment services, combined with entrenched inefficiencies in the functioning of labor markets, likely hinders women and youth from accessing job opportunities. School-to-work transitions continue to be a challenge as relatively better educated young workers tend to remain unemployed. Figure 21: Trends in unemployment rate by gender and location: youth vs. non-youth Data source: LFS 2003, 2006, 2010, 2016 International migration will continue to be a critical channel for employment, and can be more effectively managed to deliver quality, inclusive jobs. More than half a million Bangladeshis a year have migrated abroad temporarily over the past decade, including significant share of women (16 percent of all out-migrants in 2016). However, significant challenges exist. Migration costs for Bangladeshis are among the highest in the world, and are often the source of heavy indebtedness and overstay of migrant workers. International employment is highly concentrated both in terms of markets (a select few receiving countries, mainly in the Gulf Cooperation Council, GCC, countries) and sectors (construction for males and domestic work for females), highlighting the need for diversification of skills and destination markets as well as worker protection. Migrant workers are often vulnerable to exploitation and abuse due to variation in the provision and protections of rights and conditions of work in receiving countries. Moreover, irregular migration flows to high-income destinations are rising, raising the risk of forced repatriation in the future. 25 Outlook, Risks and Policy Challenges The growth drivers in Bangladesh are likely to benefit from the improved global outlook. Exports and remittances are projected to recover to still below their historic double digit averages. This together with the damages caused by floods to agricultural output and infrastructure will drag growth down in FY18 to 6.4 percent followed by a rise back to 6.7 percent in FY19. Inflation is likely to increase due to overheating resulting from the excess of actual growth over the potential growth rate and adverse supply shocks. But prudent monetary policy is expected to keep inflation bearable. External current account deficit will persist, making exchange rate flexibility more important. Budget deficit will rise and not just because of election pressure on public expenditures and revenue mobilization. The public debt to GDP ratio is projected to rise as well, but remain below levels that may start worrying the creditors. Downside risks include the resurgence of political instability in the run up to elections in early 2019 and a hardening of credit constraints with increased insolvency of banks due to rising NPLs. Excess liquidity and reduction in fiscal space through cost inefficient domestic financing of budget deficit present latent risks. The recovery in global growth, underway since mid-2016, is expected to continue.12 Global manufacturing activity and trade have firmed, financing conditions remain benign, and commodity prices have stabilized. From a post-crisis low of 2.4 percent in 2016, global growth is expected to increase to 2.7 percent in 2017 and 2.9 percent 2018, mainly driven by stronger growth in Emerging Market and Developing Economies (EMDE) as obstacles to activity among commodity exporters gradually diminish. Growth in advanced economies - Bangladesh’s major export markets - is projected to recover modestly to 1.9 percent in 2017 (from 1.7 percent in 2016), and to stabilize at 1.8 percent in 2018. The improvement reflects an investment-led recovery in the advanced economies combined with receding obstacles to activity among commodity-exporting emerging market and developing economies (EMDEs). Following two years of near stagnation, activity in commodity-exporting EMDEs appears poised to grow by 1.8 percent in 2017 and 2.7 percent in 2018. However, in most of these countries, growth will remain significantly lower than pre-crisis and long-term averages. The adjustment to low commodity prices has proven more protracted than initially expected. Consequently, growth in the Middle East, where the bulk of Bangladeshi migrant workers make their living, is expected to slow as adjustments to low oil prices continue through oil production cuts and protracted fiscal consolidation. However, policy uncertainty has increased. Escalating trade restrictions from major economies could derail the rebound in global trade. EMDEs remain particularly vulnerable to this risk, as many of them rely on trade as an engine for growth and development. Moreover, persistent policy uncertainty could dampen confidence and investment. In addition, a sudden market reassessment of policy-related or geopolitical risks could trigger financial market turbulence. A re-pricing of risk and abrupt changes in financing conditions could contribute to wide movements in capital flows to EMDEs, potentially amplifying vulnerabilities in some countries. Poverty reduction in Bangladesh will continue to be underpinned by robust growth propelled by poverty reducing drivers. Output growth in FY18 is expected to be robust at around 6.4 percent, driven by industry and services (Table-8). This is slower than last year because growth in FY17 is overestimated due to undercounting of losses in agriculture and services caused by floods, among others, and some of the windfalls, such as the large pay increases in the public and related sectors, that boosted services growth in FY17 have tapered off. Exports are projected to grow faster with recovery in global trade, a 4.2 percent depreciation of the Real Effective Exchange Rate (REER) since January through July 2017, and extension of cash incentives to new exports by the government; remittances may turnaround a bit as remittances from recently increased number of Bangladeshi workers abroad begin to take effect; and private investments may pick up in response to lower interest rates and improvements in trade logistics infrastructure. These are projected to contribute to a rise in growth to 6.7 percent in FY19. Recovery in exports and remittances would help buttress the impact of growth on poverty reduction. 12 Based on World Bank, Global Economic Prospects, June 2017. 26 Table 8: Bangladesh Macro Outlook Indicators (annual % change unless indicated otherwise) 2014 2015 2016 2017 2018 f 2019 f Real GDP growth, at constant market 6.1 6.6 7.1 7.2 6.4 6.7 prices Private Consumption 4.0 5.8 3.0 4.7 4.1 4.9 Government Consumption 7.9 8.8 8.4 5.3 4.4 6.6 Gross Fixed Capital Investment 9.9 7.1 8.9 8.8 9.1 8.6 Exports, Goods and Services 3.2 -2.8 2.2 -0.6 9.8 7.2 Imports, Goods and Services 1.2 3.2 -7.1 4.0 5.4 4.9 Agriculture 4.4 3.3 2.8 3.4 2.5 3.1 Industry 8.2 9.7 11.1 10.5 10.2 8.7 Services 5.6 5.8 6.2 6.5 6.0 6.5 Inflation (Consumer Price Index) 7.3 6.4 5.9 5.4 5.9 6.2 Current Account Balance (% of GDP) 0.8 1.5 1.9 -0.6 -0.4 0.4 Financial and Capital Account (% of GDP) -0.2 1.2 0.7 1.4 0.7 -0.9 Net Foreign Direct Investment (% of GDP) 1.1 0.9 0.9 1.0 0.9 1.0 Fiscal Balance (% of GDP) -3.6 -3.9 -3.8 -5.0 -5.4 -5.0 Debt (% of GDP) 31.9 31.5 31.2 32.5 35.7 37.6 Primary Balance (% of GDP) -1.5 -2.1 -1.9 -3.2 -3.4 -2.7 Output Gap (% of Potential GDP) -0.7 -0.6 0.0 0.7 0.7 1.1 Sources: World Bank, Macroeconomics and Fiscal Management Global Practice, and Poverty Global Practice. Notes: e = estimate, f = forecast. Strategic export target continues to rely on RMG. The Export Promotion Bureau (EPB) is expecting exports to hit US37.5 billion in FY18 which means that exports would need to grow at 8.3 percent. The RMG sector is Figure 22: Monthly Export Growth (y-o-y, %) expected to drive this growth with the 30.0 strategic target for the sector being US$ 25.0 20.0 30.2 billion, 7.3 percent higher than the 15.0 export receipts from the RMG sector in 10.0 FY17. The provisional data released by 5.0 EPB for July and August, 2017, shows 0.0 that exports have started to rebound. -5.0 Overall exports have grown by 13.8 -10.0 percent on a year-on-year basis (Figure -15.0 -20.0 22), and has exceeded the strategic target Oct-14 Aug-15 Oct-15 Aug-16 Oct-16 Apr-17 Aug-17 Dec-14 Feb-15 Apr-15 Jun-15 Dec-15 Feb-16 Apr-16 Jun-16 Dec-16 Jun-17 Feb-17 by 7.9 percent. The growth has been led by the RMG sector which grew 11.8 percent above the strategic target. Source: EPB 27 Figure 23: Monthly Remittance Growth (y-o-y, %) Remittance rebound is likely to be driven by the increase in the number of workers 35 abroad. The number of Bangladeshi workers in 25 GCC countries increased by 0.5 million in FY16 15 and 0.75 million in FY17, mostly because of 5 increase in Saudi Arabia, Oman and Qatar. -5 Growth in Saudi Arabia and Oman are projected -15 to increase in 2017 and 2018 while in Qatar it is -25 projected to slow somewhat. The informal -35 market exchange rate premium has narrowed to Nov-14 Nov-15 Nov-16 Aug-14 Aug-15 Aug-16 Aug-17 May-15 Feb-15 Feb-16 May-16 Feb-17 May-17 normal levels and efforts are being made to attract remittance to official channels by Source: Bangladesh Bank reducing the cost of money transfer. Note that remittances in July-August 2017 increased by 15.8 percent relative to July-August 2016 (Figure-23). Floods will have adverse impact on production in the first half of FY18 but could contribute to higher productivity in its aftermath. The impact of floods on agriculture in Bangladesh is mixed: although severe inundation destroys crops in the monsoon flood months, monsoon floods act as an open-access resource in supplying irrigational input to agriculture. While yield rates decline when floods assume “extreme” proportions, productivity increases during “normal” floods and in the post -flood months.13 A loss of crops in the flood months is more than compensated by a bumper production of post-flood crops. Macroeconomic stability is likely to be challenged. Inflation is projected to increase as global commodity prices pick up combined with an expansionary fiscal policy and supply disruptions due to natural calamity. With actual output exceeding the potential in FY17 (Table-7), the economy is also beginning to overheat. Bangladesh will continue to rely on exports and remittances for growth and remain exposed to global uncertainties and external shocks. At the current real exchange rate, investment-related imports combined with low single digit export and remittance growth could be expected to keep the current account in deficit over the medium-term as well. For the first time in last 16 years, the overall balance of payment in July 2017 recorded a $179 million deficit, compared with $480 million surplus in July, 2016. 14 It is therefore essential that exchange rate management maintains the country’s foreign exchange reserves sufficient to ensure the economy’s resilience. But even modestly weaker-than-projected remittances growth, export demand, or commodity prices could reduce coverage considerably. As in previous years, the budget is based on overly ambitious projections for revenue growth and correspondingly ambitious capital spending targets, with the realized shortfalls for both likely to offset each other to some extent. The public debt-to-GDP ratio is projected to increase but remain below 40 percent of GDP. This favorable debt outlook is sensitive to the assumption of continued robust growth and revenue gains. Despite shortfall in revenue, fiscal deficit could be below the 5 percent budget target if expenditure adjustments beyond the usual implementation shortfall are made. Downside risks are primarily domestic. The downside risks to the outlook include a revival of political unrest in the run up to elections, a protracted slowdown in key export markets (particularly the EU and US), 13 Effects of Flood on Agricultural Productivity in Bangladesh. Available from: https://www.researchgate.net/publication/227622150_Effects_of_Flood_on_Agricultural_Productivity_in_Banglade sh [accessed Sep 1, 2017]. 14 A 47 percent increase in imports, driven by food, capital machinery and raw cotton, resulted in $497 million deficit in the current account despite 18.5 percent export and 11 percent remittance growth in July, 2017. The financial account surplus fell short of the current account deficit by $4 million which added to the $175 million outflow in the “errors and omissions” account resulted in the $17 9 overall BOP deficit. 28 a further weakening of remittances, and a weakening of corporate governance in the banking system. Excess liquidity and reduction of fiscal space through recourse to expensive sources of deficit financing present latent risk to macroeconomic stability. However, slower deposit growth resulting from negative real deposit rates combined with a pickup in domestic credit growth could dry out excess liquidity. At the same time export demand and remittances could surprise on the upside. This calls for the Bangladesh Bank to continue its flexible approach to exchange rate management, actively allowing the level of the nominal rate to adjust— as it has recently—as needed to preserve reserve buffers. More generally, the exchange rate should be the main tool to buffer the domestic economy against sustained external shocks, both positive and negative. If the current account prospects were to turn out stronger than expected for reasons that could be persistent, such as greater-than-expected export demand or remittance inflows, the nominal exchange rate should be allowed to appreciate. But if foreign exchange inflows are the result of temporary shocks, the BB would be justified in intervening to maintain the nominal peg. Bangladesh’s near and medium-term policy challenges remain formidable. Investment needs are large, both for increasing productivity and employment. Bangladesh must take advantage of the global recovery to undertake institutional and market reforms that can attract domestic and foreign private investment as well as stimulate innovative activities to help sustain growth in the long term. The macroeconomic policy- making practices and institutions will need upgrading to maintain the economy’s past growth performance. Comprehensive and well-coordinated policy efforts are required increasing the pace of job creation; raising the quality of jobs: to ensure that labor markets deliver shared prosperity for all parts of Bangladeshi society by connecting vulnerable groups to jobs. Approximately 13 percent of people still live in extreme poverty (preliminary official quarterly estimates April-June, 2016) and about half of the population are vulnerable to falling back into poverty. Moving forward in the near term, a key challenge is to accelerate the reform momentum while stemming reversals as seen recently in the case of the financial sector (Banking Companies Act) and taxation (VAT Law). Given the mounting risks ahead as election gets closer, a promising policy strategy is to take advantage of the prevailing tailwinds (low international commodity prices, comfortable foreign exchange reserves) to build greater economic resilience nationally. This means rebalancing policy towards structural reforms raising the economy’s jobs potential. Maintaining the economy’s past growth performance will require upgrading the macroeconomic policy-making practices and institutions. The monetary policy stance should be adjusted as needed to keep inflation broadly stable. Broad money and credit growth are currently consistent with this objective, but the Bangladesh Bank should be prepared to tighten its stance if credit growth begins to accelerate. It is essential to preserve foreign exchange reserves buffers to ensure resilience to external shocks. The exchange rate need to be managed flexibly as needed to accomplish this. Bangladesh Bank took a more cautious and realistic approach in its Monetary Policy Statement (MPS) for H1 of FY18. It kept the repo and the reverse repo unchanged at 6.75 percent and 4.75 percent respectively. BB has considered the need to keep inflation within the budgetary target of 5.5 percent. Inflation had reached 5.94 percent at the end of the fiscal year, before declining to 5.57 percent in July. When compared to July last year, this still represents 0.17 percentage points increase. Furthermore, the recent floods in the northern region of Bangladesh may increase rice prices which will put upward pressure on inflation. Bangladesh Bank is also targeting a 13.9 percent broad money growth with a 16.2 percent growth in private sector credit. The broad money growth target accommodates the projected 13.3 percent nominal GDP growth in FY18. BB is also targeting a 12.1 percent growth in public sector credit and an overall domestic credit growth of 15.8 percent. This is well above the 11.6 percent domestic credit growth achieved in FY17. Prudent fiscal policy has kept public debt moderate, but reform slippage has added new challenges. Raising public investment and social spending to levels consistent with the government’s growth ambitions without compromising fiscal sustainability will require boosting Bangladesh’s low budget revenue and 29 modernizing the tax system. The new VAT law would have been central to this effort, and a successful launch in July 2017 could have been an important signal that the government is determined to persevere with needed structural reforms. Beyond its direct revenue benefits (estimated at 1 percent of GDP per year), the law could also have improved compliance and reduce tax evasion across the board while serving as a key building block for future tax policy reforms. As a next step, there is considerable scope to broaden the direct tax base through a modern Direct Tax Code. Postponement of the implementation of the VAT Law requires significant early adjustments in the FY18 Budget to tap additional sources of revenue and expenditure saving to increase fiscal space (see below). More than usual adjustments will be needed to maintain fiscal prudence. The FY18 Budget needs to be revisited in response to an estimated Tk 200 billion shortfall in revenue due to the postponement of the implementation of the new VAT law. Although public expenditure will also be lower than target due to the usual implementation shortfall, budget deficit may still rise and its financing mix may need some redesigning. Coping with the revenue shortfall would require additional revenue effort as well as tightening of expenditures in FY18. In this context, the Finance Minister’s decision to revise the FY18 Budget earlier than usual is a step in the right direction. Several challenges loom large. Responding to weak aggregate demand due to weak export growth and large remittance decline warrants some fiscal stimulus. Such a fiscal expansion must be driven by investment and inclusion expenditures. Incentivizing and strengthening systems for implementation requires deep business process reforms in the development administration and the regulatory institutions (Box-2). Stopping leakages and improving targeting in the social protection programs requires diligent pursuit of reforms envisaged in the government’s National Social Security Strategy (NSSS). Addressing financial sector insolvency through massive reforms in corporate governance will be critical. Mitigating weaknesses in jobs growth is another major challenge requiring fast track reforms on ease and cost of doing business while improving the quality and coverage of infrastructure and energy. Box 2: Doing Business Reforms in Bangladesh Bangladesh’s has traditionally performed poorly on the World Bank’s Ease of Doing Business ranking. The newly formed Bangladesh Investment Development Authority (BIDA) has taken on an ambitious reform program that will attempt to improve Bangladesh’s DTF score and help to move the country to the sub -100 category. These reforms include bringing down the time for completion of process for starting business to seven days from 19.5 days. The package also eyes cutting time for giving construction permits to 60 days from 278 days and electricity to 28 days from the present 404 days. BIDA’s mid-year update claims they have been successful in pushing RAJUK to bring down the issuance of land use clearance certificate to 15 days from 30 days; special project permission certificate has been reduced to 15 days from 45 days and electricity connection can now be availed within 15 days of submitting all the necessary paperwork. While these changes represent a more behavioral change, the government has also decided to update the regulatory framework to achieve this target. The cabinet recently approved the One Stop Service Act which aims to provide quick services from a single window to potential investors. NBR is awaiting Parliamentary approval for the new Customs Act and they are also in the process of automating all the customs data and creating a national single window. While these are truly impressive steps in the right direction, the proof of the pudding is always in the eating. BIDA should continue to remain attentive to achieve its overall objective. BIDA as the coordinating agency must continue to push the different agencies concerned to adapt the targets that they had set for themselves. 30 A policy agenda for more, better, inclusive jobs. Comprehensive and well-coordinated policy efforts are required aimed at improving (i) macro and business environment; (ii) regional and sectoral policies; and (iii) labor market and skills. These areas of priority are line with the Vision 2021 and 7th Five-Year Plan of the Government of Bangladesh (GoB). Such policy efforts would cover three inter-linked objectives: • Increasing the pace of job creation: to deliver large-scale job creation that will absorb a growing labor force; • Raising the quality of jobs: to increase earnings, employment stability, working conditions, and formality • Connecting vulnerable groups to jobs: to ensure that labor markets deliver shared prosperity for all parts of Bangladeshi society. Faster, diversified job creation Regulatory reform and revisiting distortionary industrial policies will be critical for accelerating structural transformation and improving competitiveness, especially for non-RMG sectors and for SMEs. For the non-RMG sectors, policy reforms that level the playing field with currently favored sectors like RMG will be necessary to enhance competitiveness and attract new investments, and could include measures like standardizing the tax and subsidy regime and extending special customs and financing facilities to all sectors. Trade and investment climate reform will also be important to remove restrictive distortions. Removal of para-tariffs and non-tariff measures/non-tariff barriers (NTMs/NTBs) could help firms have easier access to higher quality and more competitively priced inputs. In parallel, interventions that streamline business licensing and permitting procedures will benefit entry and growth of all firms, and targeted efforts are needed to support micro/household enterprises for job creation especially in the non- agricultural rural economy. Similarly, reforms to improve contract and insolvency enforcement in the court system will be particularly critical to support the SME expansion. Better planned and faster urbanization, critical for the development of second-tier cities and the sustainability of Dhaka, will need strategic and coordinated investments in amenities, infrastructure, and administrative capacity. At the national level, Special Economic Zones to facilitate access to industrial land more broadly, by freeing up (and packaging) substantial government-owned land, and institutional reforms such as consolidating the administrative structures that govern industrial land use, could be implemented. A national perspective will also be required to coordinate interventions across the country’s large cities and their City Corporations, to develop and implement integrated urban (metropolitan) development plans that address issues of infrastructure, land, and transport systems. In parallel, at the local level, the various City Corporations – beyond those of Dhaka and Chittagong – could take an initiative to carry out development planning and implementing public investment. Improved job quality Increasing the level of formality of the labor market will contribute substantially to enhancing the quality of jobs, but it will need to be supported by interventions that boost firm productivity. Productivity growth is already challenged by infrastructure and business climate constraints. However, these constraints are amplified by poor management practices and skills gaps in the labor supply. Low and slow-growing firm productivity is also explained by a combination of challenges including financing constraints and lack of knowledge. An important set of interventions to encourage productivity growth would thus be reforms to the standards regime to promote adoption of improved standards and technologies. Facilitating migration from rural areas to urban centers, if measures for planned urbanization are taken simultaneously, may also be a policy option to facilitate access to better jobs and increase earnings opportunities. Developing a policy to enable workers in the informal sector have access to benefits and social insurance would also enhance job quality. For instance, many workers have no access to pensions as the 31 current pension system, consisting of the poverty targeted social pension (Old Age Allowance) and the Pension for Retired Government Employees and their Families a mandatory pension for government retirees, is insufficient as most workers are excluded. As Bangladesh continues the process of demographic transition, the importance of old age support will eventually become politically and socially pressing. The GoB thus needs to develop an overarching strategy or policy that expands coverage, while remaining sustainable. It could include reforms of government retiree pensions, reforms of social pensions, introduction of various schemes (e.g. voluntary, contributory savings), and possible mandatory pensions for the private formal sector. Access to jobs for vulnerable groups Given the growing importance of migration for development, there are several interventions that the GoB can make to facilitate more and safer temporary migration of workers . At the government to government (G2G) level, the GoB can expand the set of countries with which there are MoUs and bilateral labor agreements. These agreements would reduce migration costs while also reducing the vulnerability of migrant workers overseas, particularly of female migrants that have been recently sharply rising in numbers. The vulnerability can be further reduced, by developing policies to facilitate return and reintegration, which may be especially important for migrant workers concentrated in economies exposed to commodity price volatility or other macro-economic shocks like regional conflict. Bangladesh has already taken several important steps in recent years through legislation (e.g., the Overseas Employment and Migrants Act 2013 and Expatriates’ Welfare and Overseas Employment Policies 2016), and efforts should be made to ensure their implementation capacity. Youth and women represent the other vulnerable groups that may need policy support to improve access to jobs, and the policy interventions for them will need to be holistic. Unemployment rates among youth and females are rising in Bangladesh, yet there have been limited efforts for counseling, job search assistance, or intermediation services. The training opportunities and services that are available, have proven to be insufficient and/or ineffective. As a prerequisite to deep interventions, Bangladesh may benefit from a workforce development strategy to identify strategic areas of investment to ensure linkage of jobs and workers. A measure that is likely to emerge from such a strategy, and that could even be taken in parallel, is reform of the Technical Training Center system to reduce fragmentation and improve quality of services so the system fulfills its goals. 32 Appendix Table 1: Bangladesh Macroeconomic Indicators Description FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 Growth Rates (%) GDP Growth 5.6 6.5 6.5 6.0 6.1 6.6 7.1 7.2 GDP Growth Per Capita 4.4 5.3 5.3 4.8 4.8 5.4 5.9 6.0 Per Capita GDP (current US$) 760.1 838.3 859.2 954.8 1086.8 1212.2 1358.9 1508.7 Per Capita GNI (current US$) 821.7 904.7 931.9 1031.6 1159.2 1290.9 1437.1 1572.0 Per Capita GNI Atlas Method 950.0 1010.7 1076.5 1188.4 1327.7 1479.5 (US$) 780.0 870.0 Inflation (%) Rate of Inflation (CPI, %) (year on 6.8 10.9 8.7 6.8 7.3 6.4 5.9 5.4 year) Inflation (GDP deflator) 7.1 7.9 8.2 7.2 5.7 5.9 6.7 5.3 Saving & Investment (% of GDP) Gross Domestic Saving 20.8 20.6 21.2 22.0 22.1 22.2 25.0 26.1 Gross National Saving 29.4 28.9 29.9 30.5 29.2 29.0 30.8 30.3 Private Investment 21.6 22.2 22.5 21.7 22.0 22.1 23.0 23.0 Of which: FDI 0.7 0.6 0.9 1.2 0.8 0.9 0.6 0.7 Public Investment 4.7 5.3 5.8 6.6 6.6 6.8 6.7 7.3 Central Govt. Budget (% of GDP) Total Revenue 9.5 10.2 10.9 10.7 10.4 9.6 10.0 11.2 Total Expenditure 12.7 14.0 14.4 14.6 14.0 13.5 13.8 16.2 Overall Budget Deficit 3.2 3.9 3.6 3.8 3.6 3.9 3.8 5.0 Total Public Debt 35.2 34.3 33.0 32.3 31.9 31.5 31.2 32.5 Balance of Payments (% of GDP) Trade 32.6 41.2 43.0 40.1 38.4 35.0 33.1 31.2 Exports 14.1 17.6 18.0 17.7 17.2 15.7 15.1 13.7 Imports 18.6 23.6 25.0 22.4 21.2 19.3 18.0 17.5 Services & Income (net) -2.4 -3.0 -3.4 -3.7 -3.9 -3.1 -2.4 -1.9 Current Transfers 10.1 9.7 10.1 9.9 8.6 8.1 6.9 5.3 Current Account Balance 3.2 0.7 -0.3 1.6 0.8 1.5 1.9 -0.6 (including transfers) External Indicators Total Debt as % of GDP 35.2 34.3 33.0 32.3 31.9 31.5 31.2 32.5 External Debt (US$ b.) 22.4 25.4 25.5 25.4 27.7 30.8 31.7 33.6 Ext. Debt as % of GDP 19.4 19.7 19.1 16.9 16.0 15.8 14.3 13.5 BB Gross Reserves (US$ b.) (end 10.8 10.9 10.3 15.3 21.3 25.0 30.1 33.7 of period) BB Gross Reserves (in months of 5.4 3.9 3.3 5.5 5.8 7.0 7.9 8.0 imports) Money and Credit M2 Growth (%, year-on-year) 22.4 21.3 17.4 16.7 16.1 12.4 16.3 10.9 Net Domestic Asset Growth (%, 19.1 25.0 18.5 11.8 10.3 10.7 14.4 9.8 year-on-year) 33 Ratio of Private Sector Credit to 33.9 37.2 38.7 37.7 37.8 37.9 38.7 39.7 GDP (%) Exchange Rate Nominal Period Average 69.2 71.2 79.1 79.9 77.7 77.7 78.3 78.6 (TK/US$) Nominal End of Period (TK/US$) 69.5 74.2 81.8 77.8 77.6 77.8 78.4 80.6 Real Effective Exchange Rate- REER Index, 2000-01=100 (8 97.9 98.8 93.7 98.5 106.9 119.6 131.8 137.8 Currency Basket) Memorandum Items GDP at Current. Prices (Taka bill.) 7,975.4 9,158.3 10552.0 11989.2 13436.7 15158.0 17328.6 19560.6 GNI at Current. Prices (Taka bill) 8,621.4 9,883.4 11445.1 12953.5 14332.2 16142.0 18326.7 20380.4 GNI at Current. Prices Atlas 118.3 133.5 146.8 158.3 171.2 191.3 216.3 243.9 Method (US$ bill) GNI at Current Prices (US$ bill) 124.6 138.8 144.7 162.1 184.4 207.8 234.1 259.2 Population (mill.)* 151.6 153.4 155.3 157.2 159.1 161.0 162.9 164.9 Human Development Index 0.49 0.55 0.55 0.56 0.57 0.58 (value) Source: Bangladesh Bureau of Statistics, Bangladesh Bank, Ministry of Finance, The World Bank and IMF * Population data is from DECPG. 34 Table 2: Bangladesh Current Macro Economic Indicators FY15 FY16 FY17 FY18 FY18 FY17 (July- (July- (Projection) Aug) Aug) GDP Growth (%) 6.6 7.1 7.2 6.4 .. .. Inflation 6.4 5.9 5.4 5.9 5.6* 5.4* Export Growth (%) -2.8 2.2 -0.1 9.8 13.8 8.1 Import Growth (%) 3.2 -7.1 4.0 5.4 .. .. Remittance Growth (%) 7.7 -2.5 -14.5 5.0 15.8 -15.3 Current Account Balance (US$ 2875.0 4262.0 -1480.0 -1169.0 -497.0* 379.0* million) Overall Balance of Payments (US$ 4373.0 5050.0 3169.0 .. -179.0* 480.0* million) Reserves (Months of Import) 7.0 7.8 8.0 .. 8.0 7.5 Exchange Rate (Taka per Dollar) 77.7 78.3 83.9 84.1 80.7 78.4 Total Revenue (% of GDP) 9.6 10.0 11.2 11.2 .. .. Total Expenditure (% of GDP) 13.5 13.8 16.2 16.6 .. .. ADP (% of GDP) 4.0 4.6 5.7 6.9 .. .. Fiscal Deficit (% of GDP) 3.9 3.8 5.0 5.4 .. .. ADP Utilization (% of ADP 91.4 91.7 .. .. 5.0 3.7 allocation) M2 Growth (%) 12.4 16.3 10.9 13.9 10.5* 13.5* Growth of Credit to Public Sector -2.6 2.6 -12.0 12.1 -15.3* -3.4* (%) Growth of Credit to Private Sector 13.2 16.8 15.7 16.3 16.9* 16.1* (%) 1 Projections are based on World Bank and government estimates * July for relevant fiscal years All growth rates are year-on-year Source: Bangladesh Bank, Bangladesh Bureau of Statistics, Export Promotion Bureau, Ministry of Finance and WB staff estimate 35