51606 September, 2009 Bangladesh Economic Update Economic Policy and Poverty Team South Asia Region The World Bank Bangladesh Economic Update1 September 2009 Summary Overall, the macroeconomic indicators for FY092 suggest that Bangladesh has weathered the global economic crisis well so far. Low integration with the world econom y helped cushion Bangladesh from the negative effects of the crisis. Annual GDP growth dipped slightl y to reach a still healthy 5.9 percent in FY09.3 Lower international food and oil prices, co mbined with a bum per rice crop, helped brin g d own inflation . The exte rnal current account record ed a large surplus of US$2.5 bi llion because of strong rem ittance inflow s, double-di git export growth and a declining import bill. The nominal exchange rate was kept stable through interventions by Bangladesh Bank to absorb the large influx of dollars from remittances. As a result, the official foreign exchange reserves reached a record high of nearly US$7.5 billion at end-June 2009. Meanwhile, the budget deficit and its domestic financing were largely contained in FY09. Despite robust annual growth, the second half of FY09 saw flagging growth in exports and remittances. While total exports ( year-on-year) grew by an average of 20 per cent in the fir st part of FY09, their growth fell t o onl y 2 .6 percent in the second half. Moreover, the overall export data masks the diverging performance of ready-made garment (RMG) exports and the non-RMG exports ­ with the latter registering negative growth in FY09 . Rem ittances also show a si milar pattern, with growth decelerating from 30.9 percent in the first half of FY09 to 15.7 percent during the second half. Performance of exports and rem ittances in FY10 will depend on the p ace of recovery of the global economy. Looking ahead, there are other short-term risks to growth and poverty reduction in FY10. Inflationary pressures may re-emerge ­ with dispro portionate impact on the poor ­ if the liquidit y overhang in the domest ic banking sy stem continu es and international commodity prices ri se. Controls on lending rates and di rection of credit to some sectors coul d potentially lead to misallocation of resources, and growing co mmercial bank engagement in the capital markets poses a risk to their capital in the event of a decline in the market. On the fiscal side, the underutilization of the Annual Development Program (ADP) budget hampers growth and poverty reduction. Meanwhile, energy shortages continue to choke private sector investment. Bangladesh's medium-term prospects depend on a continuation of macroeconomic stability and deepening of structural reforms. The reform agenda entails maintaining macroeconomic stability and deepening financial sector and exte rnal trade refo rms. It i s also essential to rebalance the policy focus towards structural areas that have received insufficient att ention. These include econom ic governance, urban managem ent, infrastructure (espec ially power, ports and transportation), market- oriented vocational skills and quality secondary and tertiary education. 4 1 The report was put together by Zahid Hussain and Lalita Moorty, with the inputs of Sanjana Zaman, Diepak Elmer, Md. Abul Basher, Mehnaz Reza, and A.K.M. Abdullah, and was done under the guidance of Sanjay Kathuria. 2 Fiscal Year 2009 spans the period from July 2008 to June 2009. 3 "Annual" growth rates refer to change over previous fiscal years (e.g., FY09 over FY08). Unless otherwis e stated, all oth er growth rates in this brief refer to "year-on-year" rates i.e., growth in a month in 2009 over the corresponding month in 2008 (e.g., July 2009 over July 2008). 4 See World Bank (2007). "Bangladesh: Strategy for Sustained Growth." 1 A Chart-Summary of Recent Economic Developments and Short-Term Risks In FY09, real GDP growth dipped slightly to a still healthy 5.9 ... and domestic inflation stayed low ... percent ... Source: Bangladesh Bureau of Statistics Source: Bangladesh Bureau of Statistics ... while exports and remittances continued to grow... ... leading to record high external current account surplus and reserves. Source: Bangladesh Bank Source: Bangladesh Bank Looking ahead, excess liquidity, combined with potential ...export orders of ready-made garments remain sluggish... supply-side shocks in agriculture, may lead to inflationary pressures... Source: Bangladesh Bank and Bangladesh Bureau of Statistics Source: Export Promotion Bureau, BGMEA & BKMEA ... and energy shortages continue to choke private investment... ... and slow ADP implementation remains an issue. Source: Power Division, GoB Source: Implementation Monitoring & Evaluation Division, GoB 2 Recent Economic Developments Real Sector Developments Annual GDP growth in Bangladesh remained Figure 1: Annual Real GDP Growth (%) strong in FY09 despite the global economic crisis. Limited integration with the world economy shielded Bangladesh from the adverse eff ects of the global 7 economic cri sis. Growth deceler ated slightly from 6 6.2 percent in FY08 to a still healthy 5.9 percent in 5 FY09 (Figur e 1). Agricultural prod uction grew b y 4 4.6 percent (reboundi ng f rom 3.2 percent in FY0 8) 3 driven mainly by strong growth in crops an d 2 horticulture. In contrast, industrial g rowth slowed FY90 FY92 FY94 FY96 FY98 FY00 FY02 FY04 FY06 FY08 from 6.8 percent in FY0 8 to 5.9 per cent in FY0 9 mainly because of a slowdown in large-and-mediu m- scale manufacturing geared towards exports. Services Source: Bangladesh Bureau of Statistics managed to grow at 6.3 percent, slightl y below t he growth rate in FY08. While there was growth in real capital formation, it was below average for the decade. Annual real capital for mation grew by around 5.7 percent in FY 09, which i s a sharp increase fro m 1. 8 percent in FY08 but much lower than the avera ge of 8.2 percen t in the past dec ade. The invest ment-GDP ratio, measured in current prices, remained nearly flat at 24.2 percent due to declining rate of public investment. Private invest ment maintained its gradually increasing trend sinc e FY06. About three-qua rters of total investment is construction, which in nominal terms grew by 14.2 percent in FY09 co mpared with 16.9 percent growth in FY08. Investment in plant an d machinery gr ew by 6.2 pe rcent, co mpared with 1. 8 percent nominal growth in FY08. Gross national savings exceeded domestic investment. It accounted for 27 percent of GDP Figure 2: Investment & National Savings (% of GDP) in FY09, up b y a percentage point fr om a y ear earlier.5 This was because of a strong growth in 30 net factor i ncome and net current transfer s. 25 Meanwhile, the gross domestic savings, expressed as a percentage of GDP, fell slightl y to 20 percent 20 in FY09, re flecting an increas e in the private consumption growth rate while GDP growth 15 declined. This fall was more than offset by strong FY90 FY92 FY94 FY96 FY98 FY00 FY02 FY04 FY06 FY08 growth in remittances, leading to an excess of gross national saving over gross domestic Investment National Savings investment by around 2.8 percent of GDP (Figure 2). Source: Bangladesh Bureau of Statistics 5 This differs from the officially reported gross national saving rate because the latter includes statistical discrepancy. 3 Looking ahead, growth may moderate further in FY10 because of a possible decline in key components of aggregate demand: a) Private consumption, accounting f or around 75 percent of GDP, may decline because of lower agricultural growth and a slowdown in remittances. While rem ittances depend on global de velopments, agricultural performance remains subject to the vagaries of nature. Farmers have reportedly m issed the target of planting 58 m illion acres of Aman (co mpared with 55 million acres last y ear) by about 30 percent because of dro ught. Havin g missed th e p lanting win dow (m id-July to m id-August), farm ers responded by planting local varieties which have lower yields. The government has emphasized ensuring timely and adequate avail ability of agriculture input s at subsidized prices, part icularly in the Boro (the largest rice crop) season in the second half of FY10. Even if these efforts succeed, growth in crop and animal farming production will likely be lower in F Y10 because of the base effect of last y ear's bumper production. b) Private investment outlook is m ixed: (i) Over three quarters of gross fixed capital formation co mes from the construction sector, where high prices of m aterials in FY08 and the first half of FY 09 kept the annual average real growth at 5.7 percent for the two years, which is much below the average annual rate of 8 percent for the previ ous 5 years. The outlook is now improving, as indicated by a positive 3-month seasonally-adjusted and annualized rate of growth of steel i mports since Febru ary, 2009. Although the rate of growth dropped in May 2009, data on letter-of-credit (LC) opening for steel im ports suggests a likely turnaround. (ii) Imports of capital machinery ­ accounting for 14 percent of total capital formation in FY09 ­ are declining. Annualized growth in the seasonally adjusted 3-m onth moving average of import of capital machinery remained negative si nce March 2008. LC ope ning for im port of capital machinery in July 2009 declined by 5.7 percent in nominal dollar terms relative to July 2008. (iii) While the annual FDI inflows increased by 46 percent in FY09, because of a $430 million buyout of dom estic investment by foreign investors in a teleco mmunication company, this surge is not likely to be sustained. Continued energy shorta ges, high start-up costs of business, transportation bottlenecks, and slow institutional reforms suggest a pessimistic near-term outlook for private investment. c) Export growth is likely to slow further. There con tinues to be a global softening of aggregate demand amidst fears of a double-dip recession. Demand in t he US and European m arkets may not soon return to previous lev els as households cont inue deleveraging. As such, export growth m ay rem ain weak, particularly in the first half of FY10. Monetary Sector Developments In FY09, broad money grew by 20 percent while reserve money grew by 31.4 percent (Figure 3). 6 Although growth in credit to the private sector declined from nearly 25 percent at the beginni ng of FY09 to 14.6 percent towards the end because of lower demand for imports, it still made the largest contribution (11.2 percentage points) to m onetary expansion in FY09. G rowth of cred it to the public sector 6 Bangladesh Bank's (BB) annu al monetar y program adopts reserve money (R M) as the operating target while broad money (M2) is used as the intermediate target. The underlying assumption is that the growth of monetary aggregates (such as M2) has a direct impact on the domestic price level. By controlling the growth of monetary aggregates, BB aims to achieve price stability. In practice, BB sets the growth rate of RM that is deemed consistent with targeted inflation, with the expectation that this RM growth will in turn lead to a growth rate of M2 that is consistent with target inflation and adequate liquidity in the economy. A recent BB analysis of the d ynamic relationship (based on impulse response and v ariance decomposition) among the components of RM, however, shows that net foreign assets an d net government borrowing ­ mostly beyond the control of BB ­ have greater influence on RM changes, thus limiting BB's control over RM or M2. 4 contributed 4.8 percentage points and accu mulation Figure 3: Annual Broad Money, Reserve Money & Private Sector Credit Growth (e.o.p,%) of net foreign assets co ntributed 4.1 percentage points. 30 20 Liquidity in the banking system increased during 10 FY09. The Bangladesh Bank (BB) transacts with the authorized dealers in the inter-bank market to 0 keep the nominal exchan ge rate stable . Slowdown FY00 FY01 FY02 FY05 FY06 FY07 FY08 FY10-Jul FY03 FY04 FY09 in im port gr owth, together with strong rem ittance inflows and double-digit export gr owth, kept th e Broad Money Reserve Money interbank m arket highl y li quid in FY0 9 - a y ear in Private Sector Credit which BB' s net purchase of US$ amounted to Source: Bangladesh Bank US$1.48 bil lion. In the absence of sterilization, liquidity increased, which the banks deposited in their current accounts with BB. The deposits held with BB by the commercial ban ks increased from Tk18.6 billion at end-June, 2008 t o Tk128 billion at end-June, 2009 ­ a growth of 75 percent in FY0 9 compared with only 12.1 percent growth in FY08. Combined with increasing international Figure 4: Broad Money Growth (y-o-y, e.o.p) commodity prices, a prolonged liquidity overhang 25 and Inflation (y-o-y) in the banking system may create further 20 pressure on prices. As such, the decline in inflation 15 in FY09 to 6.7 percent (from 9.9 in FY08) cannot be 10 taken for granted. The fa ll in overall inflation in 5 FY09 was driven m ainly by a dro p in food inflation 0 from 12.3 percent in FY0 8 to 7.2 percent because of Jul00 Feb01 Sep01 Apr02 Nov02 Jun03 Jan04 Aug04 Mar05 Oct05 May06 Dec06 Jul07 Feb08 Sep08 Apr09 a good harve st and fall in international rice prices. Non-food inf lation at the end of FY09 rem ained quite high at 5.9 percent, thoug h lo wer than 6.3 Inflation M2 Growth percent in FY08. Meanwhile, international commodity prices have st arted rising recently while Source: Bangladesh Bank & Bangladesh Bureau of domestic monetary ex pansion conti nues to be h igh. Statistics This can create further pressure on prices. It must be noted that while monetary growth and inflation appear to move in tandem in Bangladesh (Figure 4), there has been significant diver gence between the two si nce January 2008 because of increased recourse to administered prices since t he onset of the global fo od crisis. The correlation, however, has not broken down entirely. Also, non-food inflation is more influenced by monetary conditions. The BB adopted an expansionary monetary policy for July to December 2009 to deal with the global economic crisis but questions remain. BB' s monetary policy seeks to accommodate the central government's expansionary fiscal stance for FY10 to m itigate th e i mpact of t he global econom ic crisis. The target growth rate of broad m oney is 15.5 pe rcent in FY10 to acco mmodate 6.0 perce nt real GDP growth and 6 .5 percent inflation. Private sector cred it growth is projected at 1 6.7 percent, while publi c sector credit is forecast to grow at 25.3 percent.7 7 Monetary outcomes in July 2009 have gen erally not been in line with the Monet ary Policy Statement. Broad money growth declined to 18.8 percent compared to the same month last year as private credit growth declined further to 14.2 percent. But net foreign assets increased by 32.7 percent. 5 A ceiling on lending rate has been imposed. Figure 5: Real Interest Rates (%) Real inter est rates have continued to increase 15 (Figure 5). In order to reduce the excess liquidit y 10 and to i nduce private sector investors to b orrow 5 from the financial system, starting from the second 0 quarter of 2009, BB im posed lending rate cap at Feb-07 May-07 Aug-07 Nov-07 Feb-08 May-08 Aug-08 Nov-08 Feb-09 May-09 -5 13 percent which has eventually been translated -10 into deposit rate cap of 8.5 percent for term deposits and around 6 percent for savings deposits. Commercial Lending Rate The deposit rate barely c overs the inflation rate Deposit Rate (3 to 6 months) posing disincentive for the people to save. The cap on the lending rate is based on the assumption Source: Bangladesh Bank that nom inal commercial banking len ding rate is downwardly rigid. An analysis (Box 1) shows that the rates on national savings certificates set a floor for the commercial bank lending rate. In addition, BB has initiated a number of other measures. These include targeted lending pr ograms, for listed commercial ban ks, starting from second quarter of 2009. These are: (1) extending 5 percent of the loanable fund t o agric ulture sector at 2 percent nominal rate of interest; (2) rescheduling of loan installments r eceivable till Septem ber 30, 2009 for major export sectors, aff ected by global recession; and (3) establishing 3 rural branches for each new urban bank branch. Directed credit to "priority sectors" may not have the desired effects. The BB in its Monetary Policy Statement rei terated the n eed to channel credit to priority sectors like SMEs and agriculture, this ti me through `m andatory' rath er than `adv isory' appr oaches. Lending for agri culture has been m ade compulsory for all co mmercial banks, with incentives in the form of refinance facilities, and ceilings on lending rates and charges /fees for priority sectors. These approaches do not have a history of m uch success, and it rem ains to be seen as to how m uch additional credit flows to the priority sectors. More promising avenues are the fostering of strong com petition i n lending, and also nurturi ng of specialized institutions to deal with issues of access to finance for rural and small borrowers.8 External Sector Developments Bangladesh's balance of payments situation remained sound in FY09 despite the impact of the global economic crisis. The external current acco unt has r ecorded a large surplus US$2.5 billion in FY09 (equivalent to 2.8 percent of GDP) because o f strong rem ittance inflows and double-digit export growth (Figure 6). FY09 ended with a stock of US$7.5 billion official foreign exchange reserves ­ nearly 22 percent hi gher than en d-June 200 8. Official re serves increased further in mid-September after IMF released US$ $630 m illion as part of the Special Drawing Rights (SDR) allo cation made to all IMF members (Figure 7).9 8 BB does allow for the possibility of banks to lend indirectly to priority sectors through locally active financial institutions. 9 The IMF will provide another $105 million shortly as part of its stepped up efforts to inject liquidity in the central banks across the globe. 6 Figure 6: Current Account Balance Figure 7: Foreign Exchange Reserves (% of GDP) (Million US$) 2.8 3.0 9000 7500 2.0 1.3 1.4 6000 0.9 1.0 0.3 0.3 0.3 4500 0.0 3000 0.0 1500 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 1.0 0 FY02... FY03... FY03... FY04... FY05... FY06... FY06... FY07... FY08... FY09... FY09... 2.0 0.9 3.0 2.2 Source: Bangladesh Bank Source: Bangladesh Bank Exports continued to grow in FY09, especially in the first half of the year. Exports reached US$15.6 billion i n FY09 com pared to US$14. 1 billion i n FY08, registering an annual growth of 10.3 percent. However, export performance deteriorated in the second half of FY09 in the wake of the global economic crisis. While total exp orts grew ( year-on-year) at an average of around 2 0 p ercent in the first half o f FY09, the growth rate dropped to 2.6 percent in the second half. In fact, the fiscal year ended with a year- on-year decline of total exports in June of 3.2 percent. Of total exports, the ready-made garments (RMG) sector did better than the non-RMG Figure 8: RMG and Non-RMG Export sector in FY09. The RMG se ctor displa yed a 75 Growth (%) strong growt h performance in FY09 while exports 60 declined in all other major export categories (Figure 45 8). Knitwear and woven garments grew annuall y 30 by 16.2 percent and 14.5 percent respectively . 15 0 RMG exports, which account for 21 percent of total 15 Jan08 Mar08 May08 Jul08 Nov08 Jan09 Mar09 May09 Jul09 Sep08 exports, declined b y 6 p ercent. However, so me 30 non-RMG sectors ­ like pharmaceuticals did see 45 positive growth (see below). In addition to reduced RMG NonRMG demand, both RMG and non-RMG items have also witnessed downward pressure on prices. Source: Bangladesh Export Promotion Bureau Export orders began declining in the last quarter of FY09 and its impact is beginning to show in Figure 9: Export Growth (%) recent export shipments. FY10 began with a year- on year decline in ex ports by around 6.8 percent in July 2009 (Figure 9). The decline, in p art, reflects 70 60 the base effect of a 71 percent increase i n exports in 50 40 July 2 008. However, the top 25 out of a total 35 30 export item s declined, in cluding wo ven garm ents 20 10 which dropp ed by 4. 7 percent. Knitwear grew by 0 only 1.8 percent, y ear-on-year, while frozen food -10 Jan-08 Mar-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 Jul-09 May-08 May-09 slumped 50 percent. Export prices of manufactured items dropped nearly 5 pe rcent, the sharpest fall in more than a y ear. According to the Bangladesh Garment Manufacturers and Expor ters' Association Source: Bangladesh Export Promotion Bureau (BGMEA), prices of woven garments have shrunk by 7 20-25 percent, over 100 factories have already shut down, laying off nearly 50,000 workers, and many of those in business are incurring losses. There are signs of optimism that point to a possible recovery of exports later in the year (see Box 2, page 20). The optim ism hinges on the prospects of re covery in external demand as well as the resolution of several domestic constraints includin g the shor tages of gas an d power sup plies. On the non-RMG export side, there are so me positive developm ents as well. In response to th e decline of exports of finished leather products, Bangladeshi manufacturers have started developing their expertise in footwear and leather bags and purses, as these items continued to grow by 10 percent and 90 percent respectively in the past fisca l y ear.10 Acco rding t o ind ustry insi ders, the declinin g global demand for fashionable and costly leather products is seen as an opportunity for Bangladesh to produce ordinar y but es sential items. The cost of p roduction is lower in Bangladesh than in China and India, which has resulted in increased orders from European markets. The phar maceutical sector also grew at an annual rate of 6.2 percent i n FY09. Import payments and demand decreased in FY09, reflecting falling commodity prices and weak business confidence. The annual growth of total imports in nominal dollar terms declined to 4.1 percent in FY09, a significant fall com pared to the average annual gr owth rate of 17.6 percent durin g the preceding five y ears. T he fall in comm odity prices in t he world m arket, a lthough rebounding recently, and the decrease in the quantit y of imports of some goods (food in particular) contributed to the sluggish growth of imports in FY09: a) The global price of m ain imports, such as wheat, o il and oil se eds, petroleum, raw cotton and plastics declined by 2-36 percent. b) The price of rice incre ased by about 20 percent (mai nly due to the sharp increas e in the first half of FY09) but the overall qua ntity of rice im ports declined by m ore than 81 percent because of the bum per harvest of the boro crop. c) The price of capital goods and m achineries incr eased by about 33 percent and quantity of im ports decreased by 43 percent, yielding a decline in the total import bill. d) The price of petroleum declined b y about 25 percent, which contributed to a decline in the total oil imports by more than 10 percent. The rate of gr owth of im ports by export-processing zones (EPZs) in FY09 was le ss than 1 percent, wherea s the rate in FY08 was 13.1 percent. Figure 10: Remittance Growth (%) Reduced import of capital goods and machineries 60 may affect the export sector even with the global 50 recovery. Concern about the volatile global 40 economic an d financial situ ation and a vailability of 30 20 gas and electricity m ay have restrained exporters 10 from buidling capacity d uring FY0 9. This m ay 0 affect the ability of the sector to respond to a possible Jan-08 Mar-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 Jul-09 May-08 May-09 rise in exter nal de mand in the near future as the global recovery gains steam. Remittances from abroad continue to be strong Source: Bangladesh Bank despite the global economic recession. The first 10 Troubled leather makers realign export focus, The Daily Star, 10 August 2009. 8 two months of FY10 registered US$1.8 billion i nflow of rem ittances, corr esponding to a growth of 18 percent over the same period last y ear (Figure 10). This builds u pon the stron g performance in FY09, when remittances to Bangladesh reached a record US$9.7 billion (equivalent to 10.8 percent of GDP), up by 22.4 percent over FY08. While the nominal exchange rate has been stable, there are growing concerns about competitiveness. De spite so me re cent depreciation, the real effective ex change rate (REER) ha s gradually ap preciated co mpared to its mid-2008 l evel, given t he unchange d value of t he taka-dollar nominal exchange rate (Figures 11 and 12). While Ba ngladesh has an edge over its co mpetitors in terms of labor costs, exporters are negatively affected by several other aspects of the investment climate, including lack of reliable power supply. As global export prices for garments and other goods are coming under downward pressure, the appreciating REER would have put further pressure on the prof itability of exporters from Bangladesh. Figure 11: Nominal Exchange Rate (Taka Figure 12: NEER and REER Indices per US$) 100 75 90 80 65 70 55 60 50 45 Sep03 Sep04 Sep05 Sep06 Sep07 Sep08 May03 Jan04 May04 Jan05 May05 Jan06 May06 Jan07 May07 Jan08 May08 Jan09 May09 Sep-00 Sep-01 Sep-02 Sep-03 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 NEER Note: Increase in the index means REER appreciation of the currency Source: Bangladesh Bank Source: IMF On the trade policy side, the main developments pertain to the increase in nominal protection rates in the FY10 budget. After steady progress made in the past few y ears, trade liberalization faced a reversal in FY10. The average no minal protection in FY10 rose to 23.9 percent, up from 20.1 percent in FY09 (Figur e 13) with th e wider application of supplementary dut y (im posed on 144 a dditional Figure 13: Nominal Protection Rates, (FY00-FY10) tariff lines) and regulato ry duty (im posed on 2683 tariff li nes) along wi th reduction of custom 50 duty (on 965 tariff lines). The wider application 40 of supplementary d uty and the intro duction of 30 regulatory duty on all items subject to the highest 20 CD rate of 25 percent (which include mainly 10 final consumer goods) have contributed to FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 significant tariff escalation with movement along Overall Avg Nominal Protection(%) the stages o f production. This has increased Avg Nominal Protection on Final consumer goods(%) effective protection of i mport substitutes and may also have hurt the exporting sector. Source: National Board of Revenue 9 Fiscal Developments The overall fiscal deficit was contained in FY09. It has rem ained below 4 percent of GDP for the Figure 14: Govt. Revenue & Expenditure (% past six years. The expa nsionary fiscal stance in of GDP) FY09 was muted by ADP implementation shortfall, 18 Total and savings from provisions m ade fo r fuel and 15 Expenditure fertilizer subsidies. These helped contain the 12 overall budg et deficit to 3.6 percent of GDP, 9 Total 6 Revenue compared with the FY09 revised budg et target of 3 4.1 percent and the actu al 3.7 percent deficit in 0 FY08. T he overall bud get deficit is projected to FY10... FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 increase to 5 percent in FY10 (Figure 14). Some noteworthy points for FY09 are: a) Revenue collection, p articularly ta x revenue, Source: Ministry of Finance underperformed in FY09. FY09 National Board of Revenue (NBR) revenue collection is est imated to b e 3.6 percent lower th an the original target. Growth (cumulative) in tax revenue slowed from 27.6 percent in July 2008 to 10.7 percent by June 2009. This is largely because of a reduction i n international comm odity prices and dom estic economic slowdown that reduced imports and thus im port-based taxes. Growt h (cumulative) in im port-based tax slowed fro m 51 percent in July 2008 to 5. 1 percent by June 2009. Domestic taxes grew by 12.7 percent and income ta x by 18.3 percent in FY09.11 b) Public expenditure in recent years has increased from 13.3 percent of GDP in FY04 to 14.8 percent in FY09. The increase were driven by a 4.2 percent rise in subsidies and transfers in FY09 (almost doubling since FY04). The budget also took on board the l osses incurred by Bangladesh Petroleum Corporation, Bangladesh Chemical Industries Corporation, and Bangladesh Power Development Board because of lack of pass through of i ncreases in international prices to domestic prices. A second feature of recent public expenditure trends is the secular decline in ADP spe nding to 3.2 percent of GDP in FY09 (down from 5.4 percent in FY02). The utilization rate has tended to decline as budgeted ADP size grew bigger. c) A stimulus package worth Tk.34.24 billion was disbursed in FY09 to ward off the second-round impact of the financial crisis. T he package consisted of additional Tk.25.5 bi llion for power, fertilizer, an d export (jute, leather, and frozen foods) subsidy, Tk.5 billion f or recapitalization of state owned lenders, and Tk.3.74 billion for expanding social safety net programs. 11 The declining trend in revenu e growth continued in July when the Nation al Bo ard of Revenue' s collection declined b y 2 .5 percent relative to July 2008. A sharp fall of 19 .7 percent in import-based taxes is mainly responsible for this decline. In July, domestic taxes grew by 16.4 percent and income tax by 15.2 percent. July revenue collection constituted 6 percent of total FY10 NBR revenue target, compared with 7 percent last year. 10 The deficit is likely to be financed mainly through domestic borrowing. The governm ent's fi nancing Figure 15: Budget Deficit & Deficit Financing (% of GDP) strategy has been to finance as much of the deficit as possible from external grants and concessional 8 credits. However, external financing has bee n 6 declining in recent y ears with the exception of FY08 4 when it incr eased due to e mergency assist ance to 2 cope with the i mpact of natural disast ers. Externa l 0 financing is projected to increase to 2 percent of GDP FY90 FY93 FY96 FY99 FY02 FY05 FY08 in FY10, com pared with an esti mated 1.8 percent in Net foreign financing Net domestic financing FY09. Do mestic borrowing is projected at 3 percen t Budget deficit of GDP in FY10, compared with 1.8 percent in FY09, relying largely on borrowing from the banking system Source: Ministry of Finance (see Figure 15 for long-term trends). Total public debt to GDP is falling, but some issues call for attention. First, dom estic debt has been increasing, although total public debt a s percent of GDP has been declining s ince reaching a peak in FY94. Second, interest pa yment constitutes the sec ond largest item in the FY10 budget (13.9 percent of total expenditure). Third, while debt financing is not yet a concern, the composition of foreign financing is shifting towards shorter maturity and higher inte rest loans, calling for stricter surveillance. Finally , there is also the issue of contingent liabilities, as losses incurred by state-owned enterprises continue. Bangladesh's debt indicators improved significantly in the period FY02-09, due to fiscal adjustment, rising GDP growth, higher inflation tax and real exchange rate appreciation (Table 1). Total debt-GDP ratio steadily declined fro m 52.9 pe rcent of GDP in FY02 to 43.8 percent of GDP in FY09. Prudent expenditure management and improvements in revenue mobilization reduced the primary deficit fro m 3 percent of GDP in FY0 2 to 1.4 perc ent in FY09. On average , the primary deficit h as declined by 1.6 percent of GDP during t his period. Strong growth effects, averaging 2.6 percent of GDP, and inflation tax averaging 0.95 percent of GDP reinfo rced the effect of primary deficit reduction on total debt. In addition, appreciation of the real exchange rate eroded the real value of foreign debt by about 0.9 percent of GDP per y ear. Reliance on seigniorage (pri nting of money) for deb t reduction h as increased significantly in the last fe w y ears, aver aging 1.4 pe rcent of GDP per y ear. The reduction in debt was partly offset by an increas e in interest payments, averaging 1.9 percent of GD P per y ear. A significant part of the change in debt, however, remains unexplained by the debt dynamics model. Moving forward, the fiscal policy stance for FY10 is appropriately expansionary in intent (see Box 3, page 21). Its successful im plementation requir es m uch stronger revenue mobilization than has been achieved historically and a higher rate and qualit y of expenditure, especially on the Annual Development Program. Th ere is also a Tk.50 billion stimulus package and co mpeting demands fro m various groups ­ exporters in particular ­ f or support fr om this pack age. These will have to be managed carefully . Last but not the least, the institutional preparation for im plementing the Public Private Partnership initiative, unveiled in the FY10 budget, needs to be accelerated. 11 Table 1: Debt Dynamics in Bangladesh (Percent of GDP) FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 Total Debt 52.9 51.1 49.1 47.5 46.9 46.5 44.4 43.8 44.4 Change in Debt 2.1 -1.8 -2.0 -1.6 -0.6 -0.4 -2.1 -0.6 0.6 A. Sum of Standard Items 2.9 3. 1 2.3 2. 5 1. 5 1.7 2. 0 0. 9 5.1 Interest Payments 1.7 1. 9 1.6 1. 7 1. 8 1.9 2. 2 2. 2 2.3 Primary Balance -3.0 -1 .5 -1.2 -1 .7 -1 .6 -1.2 -1 .5 -1 .4 -2.7 Seigniorage 1.7 0. 3 0.6 0. 9 1. 9 1.4 1. 6 2. 7 -0.1 B. Sum of Extra Items -3.1 -4 .4 -4.0 -3 .5 -2 .7 -6.0 -6 .3 -4 .8 -4.6 Growth Effect -2.1 -2 .5 -2.9 -2 .6 -2 .8 -2.7 -2 .5 -2 .3 -2.2 Inflation Effect -0.5 -0 .8 -0.7 -0 .9 -0 .9 -1.2 -1 .5 -1 .1 -1.0 Revaluation Effect -0.5 -1 .1 -0.3 0.0 1.0 -2.2 -2 .4 -1 .4 -1.4 Memo Items Actual Change in Debt 2.1 -1.8 -2.0 -1 .6 -0 .6 -0.4 -2 .1 -0 .6 0.6 Predicted Change in Debt -0.1 -1 .3 -1.7 -1 .0 -1 .2 -4.3 -4 .3 -3 .9 0.5 Residual 2.3 - 0.5 -0.3 -0.6 0. 6 3.9 2.2 3.3 0.1 Std. Budget Deficit 4.6 3. 4 2.9 3. 4 3. 4 3.1 3. 6 3. 6 5.0 Source: World Bank Staff estimates ShortTerm Risks and Outlook Vulnerabilities and Risks Bangladesh continues to face several risks that affect its short-term prospects for growth and poverty reduction. Chief am ong these are the risk of deepening of the glob al econo mic crisis, rising inflation, power bottlenecks, slow im plementation of the Annual Develop ment Program (ADP) and risks in the financial sector: a) If the global economic conditions continue to worsen, it could have a negative impact on exports and remittances from Bangladesh. Recent gains in production, leading indicators and trade provide reasons to believe that a bottom to the global recession has been reached. China, along with a num ber of East Asian countries appears to be leading the wa y into recovery, while leading indicators and renewed gains in export orders have underpinned prospects of an incipient revival in OECD economies. However, the risk to the external outlook is still tilted towards the downsi de. Difficult ies in banki ng across key OECD countries continu e despite strong su pport from monetary aut horities worldwide. Rising unemployment and fragility in the stability of the financial sector can renew downward pressure on asset 12 prices and trigger a deflationar y environment. There are also questions about the sustainabilit y of public debt in some countries that could add t o upward pressure on bond yields, thus threatening recovery in the housing market. Falling home prices could further undermine confidence in bank capital bases. If higher unemployment and socia l discontent prompt governme nts to expand trade restrictions and restrict immigration, countries like Bangladesh will suffer. b) Inflation also poses a short-term risk. If t he liquidity overhang persists in the banking system and the global commodity prices increase, it could put upward pressure on prices. Inflation disproportionately affects the poor, who are least able to bear the consequences. Figure 16: Maximum Load Shedding (Mega c) Meanwhile, power shortages continue to choke Watts) the private sector. Power shortages (Figure 16) are the m ost se rious and immediate of the infrastructure 1400 1200 constraints, with damaging impact on productivity and 1000 investment.12 800 600 400 200 d) Slow ADP implementation will hurt both growth 0 and poverty reduction. The go vernment has Feb07 May07 Aug07 Nov07 Feb08 May08 Aug08 Nov08 Feb09 May09 proposed an ambitious ADP increase of 32 percent for FY10 over the FY09 revised budg et. Howev er, experience has shown that the ADP utilization ha s Source: Power Division been slow and has never exceeded Tk.200 billion i n the past (Fig ure 17). It r emains to be se en if ADP Figure 17: ADP Budget and Implementation implementation speeds up in FY10. (Billion Taka) 265 300 245 260 256 220 e) Several sources of vulnerability remain in the 200 financial sector. Chief am ong these is the rapid growth in non-traditional banking activities in recent 100 195 197 years that is generating new risks, underlining t he 187 179 185 importance of strengtheni ng the regula tory perimeter. 0 Banks are rapidly increasing their engagement in capital market activity , directly or through m erchant FY05 FY06 FY07 FY08 FY09 bank and br okerage subsidiaries. Risks to capital Budget Actual Use from a fall in the market could be large for some banks. Source: Implementation Monitoring & Evaluation Also, significant traditional risks remain within the Division banking s ystem. Loan cl assification a nd provisioning remain uneven. Non-prudential govern ment interventions, such as interest rate ceilings and governm ent orders to direct cr edit and ease debt service for some s ectors raises risks, i ncreases inef ficiency and reduces transparency. NearTerm Economic Outlook The near-term outlook depends on how the risks outlined above play out in FY10. Clearly, the global econo mic outlook plays an im portant role in how events in Bangladesh unfol d goi ng forward. Economic conditions in t he US, Europe and the Gu lf Cooperation Counci l countries will need to be 12 See World Bank (2007). "Bangladesh: Strategy for Sustained Growth." 13 monitored closely (Figure 18) because they provide the markets for exports fro m Bangladesh and destinations for migration. Apart fro m this, as o utlined above, Bangladesh's own m acroeconomic policies, domestic supply conditions, particularly w eather and energy supplies will also pl ay a crucial role. Figure 18: GDP Composite Indicator for Bangladesh's Export Partners (2007 = 100), annual percent change The near-term outlook for Bangladesh's export sector hinges on the performance of the RMG exports, which constituted 79 pe rcent of total export earnings in F Y09, against the backdrop of the glo bal economic downturn. An analy sis shows that the US RMG market conditions (January 20 08-May 2 009) shows that Bangladesh's RMG exports to US were resilient in face of the industr y-wide downturn. Trends in US im port, duri ng this perio d, also reveal that US RM G imports have been les s affected by the financial crisis compared to total US i mports as well as US manufacturing imports (from all countries). It Source: Consensus Economics, IMF & WB remains to be seen if these trends hold up in FY10. Remittances will also play a major role. Despite an annual increase of 22 percent in rem ittances in FY09, the pace of growth started to deceler ate in t he second half of the fiscal y ear. The outflow of migrant workers from Bangladesh has slowed and the number of returnee migrants has increased. These risks notwithstanding, remittances to Bangladesh are exp ected to grow in FY10, albeit at a slower rate than in FY09 (Box 4). R emittances ar e expected to grow at 10 percent in the base-case scenario, 12 percent in the high-case scenario and at 8 percent in the low-case scenario. Three scenarios for FY10 are possible (Table 2). In the base-case scenario, real househol d consumption growth is assumed to slow to 5.8 percen t, compared with 6 percent in FY09 a nd growth in real exports are assu med to slow to 9 percent, compared with 12 percent achieved in FY09. With investment growth of around 5.7 percen t, which is low by Bangladesh's historic standards, Bangladesh is likely to grow at 5.5 percent in FY1 0. If sustained global recovery leads to st rong export performance and if the performance of the energy sector improves,13 investment growth could be stronger, taking GDP growth to aro und 6 percent in the high-case scenario. If the energy deficit stagnates or deteriorates and global recovery falters then export growth cannot be sustained at FY09 levels and real investment growth could decline further. In this low-case scenario, GDP growth could be as low as 4.5 percent. The medium-term outlook depends on the quality and pace of policy and structural reforms. While managing near-ter m ri sks is i mportant, the government must al so begin s ystematically to address the medium-term development issues. The reform agenda entails maintaining macroeconomic stability and deepening financial s ector and external trade refor ms. It is also e ssential to r ebalance the p olicy focus towards structural areas that have recei ved insu fficient attention. These inclu de econo mic governance, urban m anagement, infrastructure (especially po wer, ports, and transpor tation), m arket-oriented vocational skills and quality secondary and tertiary education. 14 13 The governmen t unveiled on August 30 the first stage of their stra tegy to alleviate the power crisis. The gov ernment will reportedly invite bids by September 10 for the installation of 17 diesel and furnace oil-run plants to generate 1,330 megawatts of electricity on a fast-track basis. The initiative to fast track solutions to the crisis is welcome, but an over-reliance on rental power solutions will ul timately prove to be costl y. Th ere are significant opportunities in replacing th e old governm ent owned power plants in Bangladesh. Also, the National Coal Policy needs to be finalized as soon as possible. Banglad esh's long-term energy policy must rely on rapid and efficient ex traction of domestic coal reserv es. Fi ve good qualities coal deposits, with proven reserves of more than 2.5bn MT have been discovered in Bangladesh. 14 See World Bank (2007). "Bangladesh: Strategy for Sustained Growth." 14 Table 2: FY10 Growth Scenarios (Percent Change) FY09 Actual Base Case High Case Low Case Consumption Private 6.0 5.8 5.8 5.0 Public 4.0 6.0 6.0 6.0 Gross Fixed Investment 5.7 5.7 7.3 3.9 Export (GNFS) 12.2 9.0 12.2 7.0 Import (GNFS) 15.2 10.0 11.0 8.0 GDP Growth 5.9 5.5 6.0 4.5 Source: Bangladesh Bureau of Statistics and WB Staff Estimates Poverty and Distributional Impact of the Global Economic Crisis on Bangladesh15 The welfare impact of the global economic crisis is computed using a micro-simulation model. A micro sim ulation m odel li nking m acro projections w ith household data from past y ears provides rough assessment of the welfare i mpact of the financial cr isis. The following assu mptions were made: (i) due to the impact of the crisis, if we assu me that GDP gr owth is 0.8 p ercentage point lower in F Y09; and (ii) 1.4 percentage point lower in FY10, compared to a scenario without the crisis. Overall, the impact of crisis on employment and income is estimated to be small. Given the nature of the macroeconomic impacts, the welfare impact of the crisis is felt most by households employed outside agriculture and/or receiving rem ittances from abroad. The aggregate i mpact on employment is estimated to be low ­ the crisis added about 0.2 t o 0.5 million to the number of adults (of age 15-64 y ears) who are not e mployed. There w as so me shift in e mployment from industry to the other sectors ­ the share of industry in t otal em ployment declined b y an estimat ed 1.3 percentage points due to th e crisis. The impacts on earnings, em ployment and rem ittances resu lted in 0.8 percent lowe r labor income and 1.6 percent lower non-labor income in FY09. In FY10, labor income is projected to be 2.2 percent lower and non-labor inco me.5 percent lower, com pared to t he scenario without crisis. 16 As a res ult, average household income is likely to have been 0.9 percent lo wer in FY09 and is projected to be 3 percent lower in FY10, compared to the no-crisis scenario. Commensurate with the impacts on household income, the impact on poverty measures is low overall, but more significant in 2010 than in 2009. In 2009, poverty rate (share of population below the upper poverty line) and extreme poverty rate (share below the lower poverty line) are estimated to be 0.5 and 0.4 percentage points higher, resp ectively, as a result of the crisis. In 2 010, poverty and extre me poverty rates are projected to be 1.6 a nd 1.1 percentage point h igher, respectively. The im pact on the poverty gap is also projected to be larger in 2 010 than in 2009, while the impact on overall inequality is 15 Based on "Assessing Ex Ante th e Poverty and Distributional Impact of the Global Crisis in a Developing Country," PRMPR, World Bank (Mimeo). Updated version of the full paper will be available shortly. 16 The significan tly l arger non-l abor incom e loss in 2010 is attr ibutable to a 9 percen t loss in remittance inco me in 2010 compared to a 3 percent loss in 2009. 15 negligible for both years. Instead of a decline of nearly 11 percentage points between 2005 and 2010 i n the absence of the crisis, the povert y r ate is now proj ected to fall b y ab out 9 percentage points. T his would translate to around 2.4 million additional poor indivi duals in 2010 du e to the crisis. The crisis is projected to r aise the poverty rate by similar levels in rural and urban areas, com pared to the no-crisis scenario for both years. However, in relative terms, the i mpact on urban poverty is higher than on rural poverty. The estimated impact is also uneven between different regions of the country, with the more industrialized and integrated regions likely to be affected more by the crisis. The eastern part of the country (Dhaka, Chittagong and Sy lhet divisions) had far outpaced the west (Rajshahi , Barisal and Khulna) in poverty reduction between 2000 an d 2005. The crisis is, however, expected to have a greater impact in the east than the west be cause the east has a much higher concentration of industry and external remittances than the west. For both 2009 and 2010, the average loss in household income due to the crisis is found t o be the largest for Chittagong and S ylhet (that have the highest incidence of rem ittances) followed by Dhaka, and then the other divisions. Th e impact on poverty, relative to the no-crisis poverty rates, shows a similar pattern: in 2010 for exam ple, the crisis is projected to raise poverty rate by 17 percent in Sylhet, 14 percent in Chittagong, 6 percent in Dhaka and 5 percent or less for the others. The poverty impacts, however, do not fully capture the extent of the welfare impact of the crisis. The projections also sugge st that the inc ome or c onsumption impact would be higher for the middle and upper ranges of the distribution than for the poorest groups, who are the least likely to receive remittances or work in i ndustry even in t he absence of the cri sis. The m oderately p oor and near-poor or lower middle-class in urban areas ar e aff ected more than the si milar g roup in the ru ral areas, b ecause they depend more on i ncome from the industry and services s ectors than is the case fo r their counterparts in rural areas. These projections are subject to a number of important caveats that are typical for simulations based on extrapolations from past growth, employment, income and poverty trends. Most significantly, the sim ulations cannot ta ke into account structural changes that may have oc curred in the Bangladeshi economy due to the crisis, which may l ead to poverty and distri butional im pacts differen t from what is projected here. The im pact on povert y is also sensitive to price movements, particularly in food prices. The above results are b ased on current esti mates of expected inflation and food price inflation. A departure from these estimates can y ield significantly different outcom es. If food prices were to fall significantly, for exam ple, povert y in 2010 woul d be much lower than what is estimated here. 16 Box 1: Why nominal lending rates are high - and are they really sticky downwards? The lending rate has remained relatively high in Bangladesh making it difficult to support private investment and employment. The i nterest rate spread is another area of concern, which has remained relatively high with the real deposit rate tu rning negative until recently. With no clear g uidelines to set the nominal interest rate stru cture prior to the financial sector reforms in the 1990s, the complexity and rigidity of the administered lending and deposit rates significantly undermined domestic savings mobilization and efficient credit allocation. Several factors seem to contribute to the observed large spread between deposit and lending rates in Bangladesh. The financial system is dominated by a few large banks that allegedly have some degree of market power to raise lending rat es and l ower de posit rat es. M oreover, t he b anks ha ve a p reference t o hold l ow ri sk asset s (suc h as government bo nds, in cluding Nation al Sav ings Certific ates (NSC )) a nd a bias t oward tra ding a nd com mercial lending over production and investment activities, especially in the small scale an d rural sectors. These borrowers are required to pay high ris k premiums in the form al credit market due to the widely-held perception that they are high risk borrowers. Figure 19: Interest Rate Movement Given t he c hoice bet ween h olding o f government 14 securities with h igh, relativ ely risk free rates o f ret urn 13 vis-ą-vis e xtending `risky' l oans t o private sect or 12 producers wi th pot entially high tran saction co sts, the 11 banking sector tends to prefer the former. The a verage 10 asset portfolio of the country's banking sector in recent 9 years shows that the ba nking sector holds nearly one- Jul03 Dec03 May04 Oct04 Mar05 Aug05 Jan06 Jun06 Nov06 Jul08 Dec08 May09 Apr07 Sep07 Feb08 fifth of the amount that it extends in loans and advances in th e form o f g overnment bills an d bo nds. In o ther 3 Year NSC Rate words, wi th a ppropriate measures, t he ba nking sect or 5 Year NSC Rate Commercial Lending Rate can significantly increase its current level of len ding to support domestic investment and employment. Source: Bangladesh Bank One of those "appropriate" measures could be a l owering of the rates on NSCs. Bo th the three-year and five-year NSC rates appear to set a floor for the com mercial bank lending rate (Figure 19). There is strong correlation of 0.7 between co mmercial b ank len ding rates an d th e two NSC ra tes, th e presumption b eing th at NSC rates affect the commercial banking lending rates and not vice-versa. This appears to explain why nominal lending rates tend to be high. As figure 19 shows, nominal lending rates do decline when NSC rates decline. When NSC rates increase, the lending rates catch up and tend to stay well above the NSC rates. 17 Box 2: RMG Export Performance and Prospects The RMG sector has shown resilience, but export orders are declining. There are two main reasons for the resilience of the RMG sector. The first is th e "Wal-Mart" effect, where consumers substitute more expensive products for cheaper ones such as those from Bangladesh. The second r eason is that buyers are shiftin g production fro m China to Bangladesh, as the latter may have become the world's lowest-cost producer. The RMG growth mo mentum could not be sustain ed however. While RMG exports grew at an impressive 24.2 percent (year-on-year, average) in the first half of FY09, the growth rate came down to 8.1 percent in the second half of FY09. Both the Bangladesh Garment Manufacturers and Exporters Association (BGMEA) a nd the Bangladesh Knitwear Manufacturers and Exporters Association (BKMEA) have reported a slowdown in export orders since December 2008. Orders were negative for the BGMEA in December, Janu ary, Febru ary and April. Th e BKMEA experien ced d eclining or ders for every month in 2009, except February. Given the time lag between orders and shipments of around 4 m onths for woven garments, and 2-3 months for knitwear, the slowdown in growth of RMG expor ts has become ev ident in Q4 of FY09. Moreove r, rebates of 10- 20 percent o n already-placed orders are being negotiated. According to the Bangladesh sourcing head of a top European retailer, major markets have bottomed out and orders are expected to increase again (Financial Express, May 2009). Positive export orders for BGMEA in both May (15.4 percent) and June (19.4 percent) provide some evidence of a possible recovery of retail markets in the US and Europe. This assessment is also supported by recent data from the US and EU showing Bangladesh as the main beneficiary in apparel imports. Bangladeshi apparel imports to the US grew by 12.2 percent in dollar terms between January-May 2009 (Source: Office of Textiles and Appar el). During the same period, overall clot hing im ports to the US declined b y 6 .2 percen t in value and 4.8 percent in volume. While apparel imports from Vi etnam grew at double digit too ( 10.1 percen t), sh ipments from China increased b y only 3.9 per cent. Imports from India and Sri Lanka declined by 6.3 and 6.4 percent respectively. Data for the EU paints a similar picture. Apparel imports from Bangladesh increased by 20.3 percent in the first four months of 2009 (Jan-Apr) (Source: Eurostat). But some risks r emain. According to the BGMEA, prices of woven garments have shrunk b y 20-25 percent, over 100 factories have already shut down, laying off nearly 50,000 workers, and many businesses are incurring losses. Box 3: The FY10 Budget The FY10 budg et has surpassed the size of all previous budgets in Banglad esh's history. Total expenditure is projected at 16 .6 percent of GDP. About 61 percent of th e FY10 budget comprises of recurrent expenditur es, the same proportion as in th e original FY09 budget. A num ber of spending i nitiatives th at have been funded in the FY10 budget will affect expend iture allocations in FY10-12. For th e first time, the FY10 budget for mally introduced the concept of Public Private Partnership (PPP) as a vehicle for infrastructure investment and Tk. 25 billion has been allocated for this. Other initiatives include a fiscal stimulus package (Tk 50 billion), implementation of Pay Commission r ecommendations (Tk 35 b illion), im plementation of an urgent three-year program to increase electricity generation (Tk 35.7 b illion), and construction of a 6 km bridge across the Padma riv er (Tk 15 billion). The existing safety net programs have been strengthened while a few new programs have been introduced in the budget. The FY10 revenue target is high by historic standards, but achievable as demonstrated in FY08 (27 percent growth). Revenue is slated to grow b y 15.7 p ercent relative to FY09 estim ated revenue collection. Tax-GDP ratio is projected to i ncrease from 9.0 percent in FY09 to 9.3 p ercent in FY10 and the revenue-GDP ratio is projected to increase from 11.2 per cent in FY09 to 11.6 percent in FY10. NBR alone will have to generate 78.8 percent of total incremental revenue. NBR taxes, which account for over 95 percen t of total tax co llections, are pr ojected to grow b y 16.1 percent. Achievement of revenue target would require strengthened administrative efforts to avoid leakages and bring in more eligible people within the tax net as well as energize the revenue-sensitive sectors of the domestic economy. Banglad esh has around 2.3 m illion registered incom e taxpayers of whom only 0.75 million pay taxes on a regular basis. However, about 0.15 million government employees later get tax refund. The proposed increase in the FY10 ADP is ambitious when considered in the context of the annual nominal growth of actual ADP during last decade at a rate of 5.1 percent p er annum. The size of ADP has been fixed at Tk . 305 billion in FY10 which is a 56 percent increase over the FY09 actual ADP sp ending. The shares of internal and external resources in the proposed ADP are 46 and 54 percen t respectively. T o im plement the proposed ADP, th e int ernal r esources will have to grow b y 20 percent and external resources will have to double relative to the FY09 actual ADP. Implementation of ADP and PPP, therefore, will be key challenges in this fiscal year. 18 Box 4: Outlook for Remittances Global and regional remittance flows are pro jected to decline in 2009 and a recover y is expected in 2010 and 2 011. Due to the weak economic and employment situation in migrant-destinati on countries in the first half of CY09, global remittance flows are expected to decline by 7.3-10.1 percent (World Bank, July 2009, Outlook for Remittance flows 2009-2011). For South Asia, the expected r eduction is a more modest 3.6-6 .4 p ercent. R emittances ar e an impo rtant driver of economic growth and pov erty reduction in Bangladesh. In th e past, global rem ittance flows have been stab le even during an econom ic do wnturn in the recipient coun try, and resil ient i n the face of a slowdown in the source countr y. In fact , rem ittances to Bangl adesh in FY09 increased b y 22 percent over FY08. Howeve r, the current glo bal economic crisis is affecting both develop ed and develop ing countries at the same time, which will most likely affect future remittance flows. The outflow of migrant workers in Bangladesh has slowed down significantly. In July 2010, the o utflow dropped by 57 percent compared to the same month last year. The impact of the global economic recession started to become evident in the second half of FY09, when the outflow of migrant workers d eclined by 47 percent. For the whole of FY09, the number of migrant workers finding emplo yment abroad has declined b y 33 percent, when 650 thousand migrant workers found emplo yment abro ad compared to 969 thousand in the same period last year. The number of returnee migrants has also lik ely in creased. One of th e reasons for migrants returning are the unscrupulous practices of some outsourcing companies, that often engag e in overtrading of emplo yment visas, which leads to migration of workers in excess of the legal emplo yment op portunities availabl e in the d estination countries . However, migrants are also returning as a consequence of the global recession. According to newspaper r eports, 12 ,000 workers returned from Malay sia between January­July 2009 ( The Daily Star, August 2009). Migrant workers h ave also suffered from the collapse in Dubai's construction boom, as a consequence of which, many have lost their jobs or have been sent home on long-term vacation. Several thousand Bangladeshis em ployed in the read ymade garment and text ile industries in Mauritius are being sent back as well (The Daily Star, July 2009). The economic outlook in GCC countries will be decisive for Bangladesh. The GCC countries together accounted for 63 percen t of total flows in FY09. Saudi Arabia was by far the largest source of remittances (US$2.9 billion), followed by the UAE (US$1.8 billion). The outflow of Bang ladeshi workers to GCC m ember countries has b een affected in the wake of the global financial crisis. In FY09, 461 thousand workers emigrated to the gulf countries compared to 657 thousand in FY08, corresponding to a 30 percent declin e. The recent in crease in o il pr ices to around US$70 a barrel should, however, r educe th e r isk of a f all in remittances from Bangladeshi workers in GCC countries. A regression exercise shows that the ke y determinants of change s in the level of remittance inflow are the num ber of workers finding employment abroad every year, the oil price, the exchange rate, and the GDP growth rate. Th e results show that: ( i) an additional m igrant worker brin gs in US$816 i n rem ittances annua lly; ( ii) a dollar in crease in oil pri ce in creases annual remittances b y nearly US$15 m illion; (ii i) depreci ation of ex change rate b y one taka in creases annual rem ittance b y US$18 million; and (iv). Remittances are higher during periods of low economic growth. Assuming oil pr ices at around US$70 per barr el, GDP growth at 5.5 percent, and an exchange rate of Tk 68.8 per US$, th ree FY10 scenarios result from the regression exercise: R emittances will increase by 12.3 percent in the high case scenario, 10.1 percent in th e b ase cas e s cenario, and 8 .4 per cent in th e low c ase s cenario (Table 3). The m ain reas on for the res ilience of remittance flows to Bangladesh is that the overall stock of migrants continues to increase despite the global economic recession. Table 3: FY10 Remittances Growth Projection Base Case High Case Low Case Overseas Employment 350,000 610,000 150,000 Remittances Growth (%) 10.1 12.3 8.4 19