#1Independent Review of ÎRBD Bangladesh's Development বাংলাদেশের উন্নয়নের স্বাধীন পর্যালোচনা State of the Bangladesh Economy in FY2016-17 First Reading Dhaka: 7 January 2017 POLICY DIALOGUE - CENTRE FOR www.cpd.org.bd#2Independent Review of RBD Bangladesh's Development Contents ☐ Section I: Introduction ☐ Section II: Revisiting Macroeconomic Trends in FY2016 Section III: Macroeconomic Performance in FY2017: Early Signals Section IV: Is Bangladesh Rolling Towards A Debt Stress? An Exploration of Debt Sustainability of Bangladesh in the Context of Recent Developments in External Financial Flow □ Section V: 'Food-friendly Programme for the Ultra-poor': A Populist Initiative with Positive Impact but Multiple Shortfalls Section VI: Current State of Bangladesh-India Connectivity: A Case of Low Level Equilibrium Section VII: Remittances: Delving into Causes of Depressed Trend Section VIII: Concluding Remarks CPD (2017): State of the Bangladesh Economy in FY2017 (First Reading) 2#3Independent Review of RBD CPD IRBD 2017 Team Bangladesh's Development Professor Mustafizur Rahman, Executive Director and Dr Debapriya Bhattacharya, Distinguished Fellow, CPD were in overall charge of preparing this report as the Team Leaders Lead contributions were provided by Dr Fahmida Khatun, Research Director, Dr Khondaker Golam Moazzem, Additional Research Director and Mr Towfiqul Islam Khan, Research Fellow, CPD Valuable research support was received from Mr Md. Zafar Sadique, Senior Research Associate; Ms Saifa Raz, Research Associate; Ms Shahida Pervin, Research Associate; Mr Mostafa Amir Sabbih, Research Associate; Mr Estiaque Bari, Research Associate; Mr Muntaseer Kamal, Research Associate; Mr Zeeshan Ashraf, Research Associate; Ms Nawshiba Arnob, Research Associate; Ms Silvia Zaman, Research Associate; and Mr Zareer Jowad Kazi, Programme Associate Mr Towfiqul Islam Khan was the Coordinator of the CPD IRBD 2017 Team The CPD IRBD 2017 Team would like to register its sincere gratitude to Professor Rehman Sobhan, Chairman, CPD for his advice and guidance in preparing this report CPD (2017): State of the Bangladesh Economy in FY2017 (First Reading) 3#4Independent Review of RBD Expert Group Consultation Bangladesh's Development The CPD team is grateful to all the participants at the consultation held on 29 November 2016 for sharing their views, insights and comments on the study Dr Zahid Hussain Mr Asif Ibrahim Dr A B Mirza Azizul Islam Dr Rizwanul Islam Dr Ahsan Habib Mansur Dr Mustafa K Mujeri Dr S R Osmani Dr Biru Paksha Paul Dr Quazi Shahabuddin Lead Economist The World Bank Vice-Chairman, NewAge Group of Industries and Former President, DCCI Former Advisor to the Caretaker Government Ministries of Finance and Planning Independent Economist and Former Special Advisor on Growth, Employment and Poverty Reduction ILO-Geneva Executive Director Policy Research Institute of Bangladesh (PRI) Executive Director Institute for Inclusive Finance and Development (InM) Professor University of Ulster, UK Chief Economist Bangladesh Bank Former Director General Bangladesh Institute of Development Studies (BIDS) CPD (2017): State of the Bangladesh Economy in FY2017 (First Reading) 4#5Independent Review of RBD Bangladesh's Development FY2016 Revisiting Macroeconomic Trends in FY2016 CPD (2017): State of the Bangladesh Economy in FY2017 (First Reading) 5#6Independent Review of RBD Revisiting Macroeconomic Trends in FY2016 Bangladesh's Development GDP Growth Target 7.0% CPD (2017): State of the Bangladesh Economy in FY2017 (First Reading) Agriculture growth declined 2.8% Manufacturing sector growth 11.7% Attained GDP growth 7.1% Private investment-GDP ratio increased to 23%, best in 21 years Investment-GDP ratio 29.7% Target was 30.1% Public investment-GDP ratio declined to 6.7%, also missed target 6#7Independent Review of RBD Revisiting Macroeconomic Trends in FY2016 Bangladesh's Development Revenue-GDP ratio 9.9% Target 12.1% Revenue earnings shortfall Tk. 37,057 cr CPD projection was Tk. 38,000 cr NBR revenue growth 18% Target 42.3% CPD projection was 17.8% CPD (2017): State of the Bangladesh Economy in FY2017 (First Reading) 7#8Independent Review of RBD Revisiting Macroeconomic Trends in FY2016 Bangladesh's Development Achieved 13.0% Total Expenditure-GDP Ratio Target 17.1% Annual Development Programme 'Last quarter syndrome' aggravated for ADP expenditure Highest in last 11 years First three quarters 56% Actual 15.1% Last month 29% Last quarters 44% Non-Development Expenditure Growth CPD (2017): State of the Bangladesh Economy in FY2017 (First Reading) Target 44.3% 8#9Independent Review of RBD Revisiting Macroeconomic Trends in FY2016 Bangladesh's Development + Expenditure 10.8% Foreign Borrowing and Grants 89.2% Domestic Borrowing 3.1% of GDP 5% of GDP TARGET ACTUAL BUDGET DEFICIT 63.2% NSD sales น Deficit Financing Revenue CPD (2017): State of the Bangladesh Economy in FY2017 (First Reading)#10Independent Review of RBD Revisiting Macroeconomic Trends in FY2016 Bangladesh's Development NPL 10.1% Private sector credit growth 16.8% Recapitalisation of banks Tk. 1,800 cr Weak Performance of Banking and Financial Sector ATM scams Rising excess liquidity Bangladesh Bank heist USD 81 mln CPD (2017): State of the Bangladesh Economy in FY2017 (First Reading) 10#11Independent Review of RBD Revisiting Macroeconomic Trends in FY2016 Bangladesh's Development Urban 7.1% Rural 4.2% Actual 5.9% Target 6.1% 7.5% Non-Food 4.9% Food INFLATION CPD (2017): State of the Bangladesh Economy in FY2017 (First Reading) 11#12Independent Review of RBD Revisiting Macroeconomic Trends in FY2016 Bangladesh's Development Import Growth Target 11.5% Actual 5.4% Target 7.3% Export Growth Actual 9.7% CPD (2017): State of the Bangladesh Economy in FY2017 (First Reading) 12#13Independent Review of RBD Revisiting Macroeconomic Trends in FY2016 Bangladesh's Development SOFAMERICA Remittance OFAMER CL76841714 A the Treasury REDDON ARS L2083727R IN AV STATES ERICA בל כעת Owth (-)2.5 % Migration Growth 48.2 CPD (2017): State of the Bangladesh Economy in FY2017 (First Reading)#14Independent Review of RBD Bangladesh's Development FY2017 Macroeconomic Performance in FY2017: Early Signals CPD (2017): State of the Bangladesh Economy in FY2017 (First Reading) 14#15Independent Review of RBD Bangladesh's Development Macroeconomic Performance in FY2017: Early Signals As apprehended during CPD's Analysis of the National Budget for FY2017 all major parameters of fiscal framework programmed in the budget for FY2017 would eventually require to register higher growth rates 41.6 38.9 Target growth rates (FY17B over FY16 Actual) 65.2 57.4 51.3 45.5 82.3 44.5 36.8 35.4 32.5 28.7 21.6 12.3 Revenue Collection NBR Tax Revenue Non-NBR Revenue Public Expenditure ADP Non-ADP Budget Deficit Programmed growth rates (FY17B over FY16RB) CPD (2017): State of the Bangladesh Economy in FY2017 (First Reading) 15#16Independent Review of RBD Bangladesh's Development Macroeconomic Performance in FY2017: Early Signals If the status quo persists, then the possible revenue shortfall in FY17 could be about Tk. 40,000 crore With a more optimistic scenario, if revenue collection succeed to register the highest growth (26.3% in FY08) of the last 16 years, overall revenue shortfall in FY17 will be Tk. 26,000 crore 38.9 17.9 44.3 NBR Tax VAT and SD act 2012 39.7 28.5 65.7 102.5 49.7 41.6 13.7 Non-NBR Tax -5.9 Non-taxCR venue Total Revenue ■Target FY17 ■Attained in Q1 FY17 ■Required in last three quarters of FY17 Reform agenda for revenue mobilisation needs to be accelerated AIT collection through e-TDS Benami Property Bill Transfer Pricing Cell New Direct Tax Act Amended Customs Act Install ECR Documentation and accounting system for all purchases and sales CPD (2017): State of the Bangladesh Economy in FY2017 (First Reading) Ensure paid VAT are deposited to the exchequer 16#17Independent Review of RBD Bangladesh's Development Macroeconomic Performance in FY2017: Early Signals Discrepancies of statistics regarding fiscal parameters are increasing MRFP vs NBR Year Difference MRFP vs Possible IMED explanations: (NBR MRFP vs BB (Budget (ADP Revenue Deficit) ➤ Different Expenditure) Collection) methodologies FY12 3,464 490 -5,508 Different tools and FY13 5,820 562 -3,969 techniques FY14 9,092 1,586 -11,645 ➤ Different accounting FY15 12,765 8,528 -8,888 practices 9,298 16,478 5,223 FY16 (6.4%) (24.6%) (9.8%) Q1 of FY17 1,172 2,762 10,416 Figures in the parenthesis are departure from MRFP in % Causes an adverse impact on the budgetary monitoring, and the quality of fiscal and budgetary planning is thus compromised Need a reconciliation and consolidation between these estimates for the sake of ensuring efficacy of public finance management CPD (2017): State of the Bangladesh Economy in FY2017 (First Reading) 17#18Independent Review of RBD Bangladesh's Development Macroeconomic Performance in FY2017: Early Signals Public expenditure growth Q1: 12.8% Annual target: 51.3% Non-development expenditure growth Foreign interest: 14.6% Subsidy and transfer: 33.2% ADP expenditure 27.6% of allocation in Jul-Dec of FY17 (23.5% in FY16) ADP expenditure was driven by Power Sector (47.7%) Performance of the 'fast track' projects was not very promising PMB project could spent only 10.4% in first four months Reform agenda was not properly followed up CPD (2017): State of the Bangladesh Economy in FY2017 (First Reading) 18#19Independent Review of RBD Bangladesh's Development Macroeconomic Performance in FY2017: Early Signals Buoyant sale of high interest bearing NSD Budget deficit was well within the planned limit, when the first three months of FY2017 is considered Wider difference between interest Needs to address this before the national budget for FY2018 rates of bank deposit and NSD certificates influenced the savers CPD (2017): State of the Bangladesh Economy in FY2017 (First Reading) 19#20Rising non-food inflation ➤ Mainly through gross rent, fuel and lighting Urban inflation higher on aforesaid items Independent Review of RBD Bangladesh's Development Macroeconomic Performance in FY2017: Early Signals Declining general inflation ➤ Mainly through food inflation - particularly rice ➤ Also through lower global commodity price, restrained growth of broad money supply, stable exchange rate of the BDT 7.0 7.2 7.4 6.8 6.6 7.5 7.5 7.5 7.5 14 7.3 7.1 8.3 6.2 8.2 6.2 6.2 612 6.2 6.1 6.0 6.0 5.9 5.8 5.8 5.7 5.7 5.6 5.5 8.5 8.0 8.2 7.5 7.1 7.0 6.9 6.8 7.0 6.5 6.0 5.6 5.6 5.7 5.8 5.9 5.0 6.7 6.4 6.3 6.1 6.1 6.1 5.9 5.5 5.7 5.5 5.3 5.0 5.1 4.9 4.5 4.0 3.5 4.8 4.6 4.6 4.5 4.5 4.5 CPD (2017): State of the Bangladesh Economy in FY2017 (First Reading) NOV-14 DEC-14 JAN-15 FEB-15 MAR-15 APR-15 MAY 15 General JUN-15 JUL-15 AUG-15 SEP-15 OCT-15 NOV-15 DEC-15 JAN-16 FEB-16 MAR 16 APR-16 MAY 16 National Food -National Non-food 20 JUN-16 JUL-16 AUG 16 SEP-16 ОСТ-16 NOV-16 DEC-16#21Independent Review of Macroeconomic Performance in FY2017: Early RBD Signals Bangladesh's Development What is the outlook for the coming days of FY2017? Prices of all utility items have gone up or expected to increase in FY2017 Price of supplied WASA water for Dhaka dwellers increased twice in FY2017 Price of gas used in households could be raised by 50% from the beginning of 2017 Energy and non- energy commodity prices are forecasted to increase by 24 % and 2% respectively in 2017 Inflation may creep Petroleum price up a little in the Rather than increasing later part of FY2017 adjustment has to be the price of gas, due to the expected done properly in a rise of global commodity prices win-win manner government should opt for meter-based gas use policy at the household level CPD (2017): State of the Bangladesh Economy in FY2017 (First Reading) 21#22Independent Review of RBD Bangladesh's Development Macroeconomic Performance in FY2017: Early Signals 18.72% 45.57% 42.12% 73.75% 4.03% 3.45% 3.50% SCBs PCBs FBs DFIs 8.85% Share of Bank Loan in Total Loan by Bank Type (DEC 15) (-) 39.21 % (JUN 16) Share of NPL by Bank Type in Total NPL CPD (2017): State of the Bangladesh Economy in FY2017 (First Reading) NPL 10.34 % (SEP 16) Malpractices and scams Loan write off Tk. 42322 cr (JUN 16) Profitability ROA 0.44% RoE 7.33% (JUN 16) Reforms Good Governance Banking Commission Loan restructure and reschedule Sonali Bank ROE (-) 711.58 Private sector credit growth 15.0 % (NOV 16) CAR 10.31% (SEP 16) 22#23Independent Review of RBD Bangladesh's Development Macroeconomic Performance in FY2017: Early Signals NPL as % of Total Outstanding Loan PER CENT 37.84 33.12 30.93 26.78 33.46 32.81 26.10 26.14 24.68 24.68 23.20 23,20 23.23 23.92 25.70 25.16 24.30 The major 21.98 22.23 22.49 22.10 21.82 21.50 19.76 11.60 10.45 10.75 10.47 9.69 9.67 9.89 9.92 10.06 10.34 8.93 8.79 8.25 8.25 8.79 7.01 7.30 7.80 8.30 8.95 7.50 5.46 6.19 5.77 5.70 6.34 6.03 5.67 6.09 5.80 4.54 4.98 4.90 5.40 5.90 Dec, Mar, Jun, Sep, Dec, Mar, Jun, Sep, Dec, Mar, Jun, Sep, 2013 2014 2014 2014 2014 2015 2015 2015 2015 2016 2016 2016 SCBs DFIs PCBs FCBs -Total contributor to the rise in bad loans are the SCBS In December of each year NPL comes down but starts to rise afterwards NPL increased to 9.9% in Mar, 10.1% in Jun & 10.3% in Sep in 2016 from 8.8 % in Dec 2015 CPD (2017): State of the Bangladesh Economy in FY2017 (First Reading) Writing off bad loans help to heal wounds superficially 23 23#24Independent Review of RBD Bangladesh's Development 30.0 20.0 Macroeconomic Performance in FY2017: Early Signals Capital to Risk Weighted Asset (%) 10.0 0.0 2010 2013 Dec 2014 Mar 2015 Jun 15 Sep 15 Dec 15 Mar'16 Jun 16 -10.0 -20.0 -30.0 -40.0 Total SCBs DFIs PCBs FCBs Sep 16 GoB is planning to release bond particularly for the scam-hit BASIC, Sonali & Rupali banks to meet the capital shortfall Bangladesh is in the process of full implementation of Basel III from January 2020 Capital Adequacy Ratio (CAR) had to be 10.625% as of Dec 2016 (10.3% as of Sep 2016) CPD (2017): State of the Bangladesh Economy in FY2017 (First Reading) In Sep 2016, SCBS' CAR was 5.6 % & DFIs' was CAR (-) 32.9% 24#255,200 5,000 4,800 4,600 4,400 4,200 4,000 JULY AUGUST SEPTEMBER Independent Review of RBD Bangladesh's Development Macroeconomic Performance in FY2017: Early Signals OCTOBER NOVEMBER DECEMBER JANUARY FEBRUARY MARCH FY16 APRIL MAY JUNE JULY AUGUST SEPTEMBER FY17 OCTOBER NOVEMBER DECEMBER Stock market upbeat for the first six months of FY17 Key reasons: Increasing local and foreign investment, growing market confidence, consolidation of stock prices, low global price level, higher corporate earnings, lower interest rate Sectoral composition of market capitalisation is changing . From banking sector to thrust sectors such as pharmaceuticals, telecom, food and the IT sector. Market concentration is decreasing 2 out of 3 IPOs offloaded by manufacturing companies CPD (2017): State of the Bangladesh Economy in FY2017 (First Reading) 25 45#264.4 8.1 12.2 % growth required to reach USD 50 billion (Target by 2021) 6.1 5.9 6.2 11.4 2.9 10.0 15.9 Independent Review of RBD Bangladesh's Development Macroeconomic Performance in FY2017: Early Signals 4.8 7.4 RMG Knit Woven Jul-Dec FY17 Non-RMG Total Growth Target Achieved Growth Required growth FY17 for rest of FY17 CPD (2017): State of the Bangladesh Economy in FY2017 (First Reading) 4.4 8.0 9.9 11.2 11.9 % growth required to reach USD 60 billion (Target by 2021) ☐ Export earnings well below the target Major setbacks: Non-traditional markets US market EU market in December EXIT ☐ Changing dynamics in global trade regime D 26#27Independent Review of RBD Bangladesh's Development Macroeconomic Performance in FY2017: Early Signals Import payment growth 9.5% (Jul-Nov) Balance of Payment (Jul-Nov) USD 1.9 billion 54.9% 43.4% Trade Balance USD (-) 3.9 billion Current Account Balance USD (-) 726 million W 24.5% Petroleum Product Wheat Capital Machinery CPD (2017): State of the Bangladesh Economy in FY2017 (First Reading) Net FDI USD 719 million 27 27#28Independent Review of RBD Bangladesh's Development Macroeconomic Performance in FY2017: Early Signals ☐ Exchange rate of BDT against USD remained stable but volatile with others 105 ☐ Growing gap between cash and headline rate for BDT- USD exchange 14 5.0 4.4 4.5 100 12 4.0 95 90 85 80 10 3.5 3.3 3.4 3.4 2.9 3.0 8 3.0 2.5 2.2 6 2.0 2.0 1.8 2.0 75 4 1.4 1.5 70 2 0.8 1.0 65 0.5 60 Jul-16 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Euro UK Pound Sterling Chinese Yuan US Dollar -Indian Rupee Dec-15 Jun-16 Jul-16 Aug-16 Nov-16 Dec-16 Buy -Sell ☐ Consideration of real effective exchange rate for trade policy purposes due to its implicit tie to export and import performance CPD (2017): State of the Bangladesh Economy in FY2017 (First Reading) 28#29Independent Review of RBD Bangladesh's Development Macroeconomic Performance in FY2017: Early Signals □ Foreign exchange reserve maintained upward trajectory ➤ USD 32.1 billion at the end of December FY17 ➤ USD 2 billion increase between July and December 2016 $ $ What to do with this growing reserve? – Sovereign Wealth Fund (SWF) for infrastructure?? ➤ Relevant concerns: ◉ Low return from infrastructure Long gestation period Political goodwill Monitoring governance CPD (2017): State of the Bangladesh Economy in FY2017 (First Reading) 29#30Independent Review of RBD Bangladesh's Development Macroeconomic Performance in FY2017: Early Signals Private Investment: A Mixed Scenario! Rising excess liquidity in the banking system may indicate lack of investment demand Industrial term loan disbursement was only 2.7% in Jul-Sep Non-farm rural credit increased by only 0.9% in Jul-Sep Capital machinery import registered a significant growth (24.5% in Jul-Nov) Net FDI inflow increased by 9.6% in Jul-Nov Investment registration with BIDA: USD 14 billion by 641 projects To realise the proposed investments, deliver the needed infrastructure and policy support required in a timely manner: SEZs and other infrastructure projects, medium term solution to ensure gas supply and raising capacity of port facilities CPD (2017): State of the Bangladesh Economy in FY2017 (First Reading) 30#31Independent Review of RBD Bangladesh's Development DEBT Is Bangladesh Rolling Towards A Debt Stress? An Exploration of Debt Sustainability of Bangladesh in the Context of Recent Development in External Financial Flow CPD (2017): State of the Bangladesh Economy in FY2017 (First Reading) 31#32Independent Review of RBD Is Bangladesh Rolling Towards A Debt Stress? Bangladesh's Development Context Bangladesh's public debt situation, encompassing both external and domestic debt, comfortable according to conventional debt sustainability tools Attainment of Public Debt in FY2015 Distribution of Revenue Expenditure in FY2015 Pay and Allowances 0% 6% 23% 37.7% 33% 62.3% I Domestic Source External Source 25% 13% Possible emergence of public debt distress due ■Goods and Services Interest Payments Subsidies and Current Transfers Block Allocation Acquisition of Assets and Works to new dynamics, which are: 1. New flow of external finance, subject to higher interest rates and currency mismatch problem. 2. Increasing dependence on NSD instruments 3. Ineligibility to access concessional loans High possibility of rise in debt servicing because of the advent of these evolving dynamics CPD (2017): State of the Bangladesh Economy in FY2017 (First Reading) 42 32#33Independent Review of RBD Is Bangladesh Rolling Towards A Debt Stress? Bangladesh's Development Adopted Methodology □ In the wake of these new dynamics, CPD undertaking data analysis of debt sustainability in Bangladesh and carrying out simulation exercise by injecting external flows, interest rate and exchange rate shocks according to two methodologies Condition of debt sustainability A. Present value of external debt-GDP ratio < 40% 1. IMF/World Bank Debt Sustainability Framework B. Present value of external debt-revenue ratio < 250% 2. Debt-Stabilising Primary Balance Approach C. Present value of debt service-revenue ratio < 20% Condition of debt sustainability A. Economic growth rate>Real Interest Rate B. Actual Primary Balance (% of GDP) > Debt- Stabilising Primary Balance (% of GDP) CPD (2017): State of the Bangladesh Economy in FY2017 (First Reading) C. Primary Balance Gap (% of GDP) ≤ 0 33#3440 35 30 25 Independent Review of RBD Is Bangladesh Rolling Towards A Debt Stress? Bangladesh's Development Scenario One: Simulation Using IMF/World Bank Debt Sustainability Framework Present Value of External Debt-GDP Ratio (%) 250 0.81% rise 200 Present Value of External Debt-Revenue Ratio 150 111.48 100 20 11.89 12.7 15 9.75 0.51% rise 50 10 10 0 5 9.24 0 FY2017 FY2020 FY2017 (%) 23.4 % rise 21.28% rise 78.69 88.08 57.41 External Debt Service-Revenue Ratio (%) i. Shocks (Compared to Baseline Scenario) Annual USD 2 bln financial flow 20 18 16 14 ii. 2% exchange rate depreciation 12 10 8.79 iii. 3% rise in nominal interest rate iv. Tk. 30,000 crore shortfall in 8 6 4 revenue collection 2 CPD (2017): State of the Bangladesh Economy in FY2017 (First Reading) FY2017 5.01 FY2020 3.78 % rise 7.92 2.6 % rise 5.32 FY2020 34#35Independent Review of RBD Is Bangladesh Rolling Towards A Debt Stress? Bangladesh's Development Scenario Two: Simulation Using IMF/World Bank Debt Sustainability Framework Present Value of External Debt-GDP Ratio (%) Present Value of External Debt-Revenue Ratio 40 40 35 30 25 20 20 13.98 15 10 10 5 0 FY2017 11.89 250 (%) 1.28% rise 22.68% rise 0.81% rise 200 134.16 23.4% rise 10.53% rise 150 0.79% rise 89.22 100 9,75 .0.51% rise 50 88.08 57.41 9.24 0 FY2020 FY2017 FY2020 External Debt Service-Revenue Ratio (%) 3.73% rise 1.95% rise 9.87 3.78% rise 2.6% rise 5.32 FY2020 20 i. ii. Shocks (Compared to Baseline Scenario) Annual USD 5 bln financial flow 5% exchange rate depreciation iii. 5% rise in nominal interest rate 18 16 14 11.9 12 10 8 6 iv. Tk. 50,000 crore shortfall in revenue collection 4 5.01 2 0 CPD (2017): State of the Bangladesh Economy in FY2017 (First Reading) FY2017#362 Independent Review of RBD Is Bangladesh Rolling Towards A Debt Stress? Bangladesh's Development Scenario One: Simulation Using Debt-Stabilising Primary Balance Approach FY2017 Shocks (Compared to Baseline Scenario 2 i.e. 5.5%) FY2020 1.2 1 Annual 1% rise in¹ real interest rate 0 Debt-Stabilising Primary Balance (Per Primary Balance Gap (Per cent of GDP) -1 -2 -3 -4 -5 cent of GDP) -6 -5.86 -7 -1.6 -1 Debt-Stabilising Primary Balance (Per cent of GDP) Primary Balance Gap (Per cent of GDP) -2 -3 -3.06 -4 -5 -4.56 -6 -6.06 -7 -3.56 -2.06 Baseline Scenario Annual 1 per cent increase in real interest rate CPD (2017): State of the Bangladesh Economy in FY2017 (First Reading) Baseline Scenario Annual 1 per cent rise in real interest rate 36#37Independent Review of RBD Is Bangladesh Rolling Towards A Debt Stress? Bangladesh's Development 6 Scenario Two: Simulation Using Debt-Stabilising Primary Balance Approach FY2017 5.45 Shocks (Compared to Baseline Scenario: 5.5%) FY2020 4 2.65 2 4 Annual 2% rise in real interest rate 2 0 1.81 -0.69 0 Debt-Stabilising Debt-Stabilising Primary Balance Primary Balance Gap (Per cent of -2 Primary Balance (Per cent of GDP) Primary Balance Gap (Per cent of GDP) -2 (Per cent of GDP) GDP) -4 -3.06 -4 -3.56 -6 -6.06 Baseline Scenario Baseline Scenario -6 -5.86 -8 1 Annual 2 per cent increase in real interest rate -8 Annual 2 per cent rise in real interest rate If the value of the debt-stabilising primary balance increases, the government needs to maintain higher budget surplus (or lower budget deficit) CPD (2017): State of the Bangladesh Economy in FY2017 (First Reading) 37#38Independent Review of RBD Is Bangladesh Rolling Towards A Debt Stress? Bangladesh's Development Policy Perspective Concerns for sustaining public debt due to new flow of foreign finance, which are 1. Shorter maturity of these flows, entailing greater debt service payment 2. "Tied" nature of foreign loans 3. Risk of currency mismatch 4. Unknown generation of Internal Rate of Return 5. Maintaining quality, timeliness and good governance in implementation debt-financed projects' Likelihood of facing debt distress if projects fail to realise anticipated benefits Significant portion of revenue expenditure already pledged to debt servicing Necessity of devising Medium-Term Debt Management Policy regarding changes in borrowing mix and nature of new foreign financial flows CPD (2017): State of the Bangladesh Economy in FY2017 (First Reading) 38#39Independent Review of RBD Bangladesh's Development 'Food-friendly Programme for the Ultra-poor': A Populist Initiative with Positive Impact but Multiple Shortfalls CPD (2017): State of the Bangladesh Economy in FY2017 (First Reading) 39 99#40Independent Review of RBD Food-friendly Programme for the Ultra-poor Bangladesh's Development 田 • A total of 4.91 million people has been enlisted as beneficiary against the target number of beneficiaries of 5 million The MoF has made an allocation of 750,000 tonnes of rice for this programme Cover five million families with a monthly allocation of 30 kg of rice to be distributed at a subsidised price of Tk. 10 per kg • A total of 9,878 dealers has distributed about 388,695 mln tonnes of rice CPD (2017): State of the Bangladesh Economy in FY2017 (First Reading) 40 40#41Independent Review of RBD Food-friendly Programme for the Ultra-poor Bangladesh's Development Review of Food-Friendly Programme for the Ultra-poor The term 'ultra-poor' is a subset of the 'people under the poverty line' (not 'mutually exclusive') Risk of misidentification ('inclusion', 'exclusion', 'duplication' and 'fake' identity) ☐ Concerned authorities partly addressed 'selection' problem through cancellation of 4.5% of beneficiaries and 1.3% dealers ☐ Gap between actual received and targeted rice was on average 11 kg per beneficiary: indication of inefficiency and weakness in the distribution process ☐ The Division-wise distribution of rice under the FFP is not fully overlapped with the national level distribution of ultra- poor: there is scope for improvement in targeting at national level planning Division-wise Distribution of Rice under the FFP Rangpur 15% Rajshahi 13% Barisal 10% Dhaka 27% Khulna 13% CPD (2017): State of the Bangladesh Economy in FY2017 (First Reading) Sylhet 6% Chittagong 16% 41#42Independent Review of RBD Food-friendly Programme for the Ultra-poor Bangladesh's Development Implications ✓ The FFP was even not announced or included in the national budget for FY2017 ✓ Coarse rice price increased during the time of operation of the programme ✓ Lack of adequate stock caused Ministry of Food to stop selling rice under OMS programme ✓ Despite the rise in overall allocation for the SSNPs, it is still below the target set in the national strategy for the Seventh Five Year Plan (3% of GDP) ✓ An approximate estimate shows that the government has to allocate an additional Tk.1.74 crore to commence this programme CPD (2017): State of the Bangladesh Economy in FY2017 (First Reading) 0 42#43Independent Review of RBD Food-friendly Programme for the Ultra-poor Bangladesh's Development Narshingdi District's Food-friendly Programme: A Case Study The average quantity received by each of the beneficiaries was 82 kg against 90 kg for three months: a part of the allocated quantity was perhaps with the vested quarters including the dealers who benefited from this Gap between Target and Actual quantity received by beneficiaries 120 Palash Narsingdi Monohardi NARSINGDI (DISTRICT) 100 80 Belabo Shibpur 60 40 Raipura 20 Sadar CPD (2017): State of the Bangladesh Economy in FY2017 (First Reading) Raepur Palash Shibpur Monohordi Belabo Total 43 43#44Independent Review of RBD Food-friendly Programme for the Ultra-poor Bangladesh's Development Narshingdi District's Food-friendly Programme: A Case Study Identification of most of the beneficiaries and selection of dealers did not fully comply through the official process Wider coverage of beneficiaries by a single dealer: leads to face additional transportation cost for beneficiary to collect rice Beneficiaries identified by dealers Use of traditional bucket instead of automated weighting machine may lead to rise in discrepancy in the quantity of rice received by the beneficiaries. - Inclusion of temporary dwellers a possible area of lack of monitoring by the local authority Poor commission charge for dealers (would receive approximately TK 67,500) CPD (2017): State of the Bangladesh Economy in FY2017 (First Reading) 44#45Independent Review of RBD Food-friendly Programme for the Ultra-poor Bangladesh's Development ☐ The total stock after the end of the programme was at a lower level (7.30 lac MT as of December, 2016) which is significantly less compared to the required quantity of stock for meeting the emergency needs PFDS Stock during 2015 and 2016 (Rice and Wheat) ☐ The programme may have an impact on stabilising the market price at the end of the programme at a higher level in the major districts District-wise Monthly Average Retail Price of "Boro-HYV-Coarse” (per kg in taka) 1800 1600 1534 1400 1200 1099 1000 800 600 400 200 0 45 35 30 1124 730.1 856 747 325 25 20 15 435.5 10 458 July Aug Sept Oct Nov Dec Jan Feb Mar Apr May June July Aug Sept Oct Nov Dec -Rice Wheat -Total Сл 5 Period of FFP JAN FEB MAR APR MAY JUN JUL AUG SEP OCT NOV DEC Dhaka Khulna Barisal Rajshahi Chittagong CPD (2017): State of the Bangladesh Economy in FY2017 (First Reading) 45#46Independent Review of Bangladesh's Development RBD Food-friendly Programme for the Ultra-poor What can be done to improve FFP? Corrective measures for better transparency in management and operations Determine a proper definition for ultra poor for appropriate policy actions Better planning & targeting of beneficiaries. Also, following poverty mapping in selected districts Strengthening the monitoring process stage for more appropriate selection of the dealers and reducing leakages The effect of the FFP in terms of its impact on price stabilisation and stocks should be closely monitored CPD (2017): State of the Bangladesh Economy in FY2017 (First Reading) stock Important to of rice sufficiently before initiating the second phase of the FFP, (possible demand for rice would be 3.62 MT) 46#47Independent Review of RBD Bangladesh's Development Kolkata Ashuganj Agartala Current State of Bangladesh-India Connectivity: A Case of Low Level Equilibrium CPD (2017): State of the Bangladesh Economy in FY2017 (First Reading) 47 47#48Independent Review of RBD Current State of Bangladesh-India Connectivity Bangladesh's Development Kolkata Ashuganj Recommended rate by Core Committee BDT 1,245 per ton Agartala Only 3 shipments in 7 months Revenue earnings: BDT 820,000 Transit charge BDT 192.2 per ton Isn't the rate too low? I guess... there are infrastructure gaps Let's Check..... CPD (2017): State of the Bangladesh Economy in FY2017 (First Reading) I think...negotiated rate is underestimated But! little confused..... why only 3 shipments? 48#49Independent Review of RBD Current State of Bangladesh-India Connectivity Bangladesh's Development Scenario A: If All Facilities were Installed Per ton in BDT 1800 1600 1400 1245 1200 1000 800 600 400 200 0 1705 Recommended Inflation Adjusted rates by Core Committee (2011) Core Committee rates (2016) 870 At currently negotiated rate According to CCT-2011, Bangladesh would earn 6 times more revenue compared to what is the case now, and it would be 9 times higher if the charges were inflation-adjusted. The cost of transshipment would however, increase respectively by USD 13.4 and USD 19.3 per ton. This will have implications for the expenses to be incurred for using the Kolkata-Ashuganj- Agartala corridor. CPD (2017): State of the Bangladesh Economy in FY2017 (First Reading) 49 49#50Independent Review of RBD Current State of Bangladesh-India Connectivity Bangladesh's Development Current State of Ashuganj International River Port (AIRP) and Road Condition between AIRP and Akhaura Land Custom (ALC) Station RCC dockyard Berthing place Water level Godown Proposed location for ICT Road quality AIRP to Sorail Bishwaroad Road quality Sorail Bishwaroad to Narrow bridge in Sultanpur to ALC station CPD (2017): State of the Bangladesh Economy in FY2017 (First Reading) Sultanpur 50 50#51Independent Review of RBD Current State of Bangladesh-India Connectivity Bangladesh's Development Scenario B: Charges with Current Port and Road Capacity Per ton in BDT 400 350 300 250 192.2 200 150 100 50 263.6 At currently What could be negotiated rate the rates according to CCT-2011 • 360.9 Inflation adjusted CCT- 2011 (2016) • • Even at current condition of port and road capacity, if the comprehensive recommendations of the CCT-2011 were taken into consideration, about 27 per cent more revenue would be earned (through addition of congestion and water pollution charges) compared to what had currently been realised. If inflation adjustment was made, this would result in doubling of the current revenue earnings. This would raise the cost of transshipment by approximately USD 1 and USD 2.1 per ton respectively Charges for congestion and water pollution as was suggested in the CCT-2011 report needs to be factored into the costing. CPD (2017): State of the Bangladesh Economy in FY2017 (First Reading) 51#52Independent Review of RBD Current State of Bangladesh-India Connectivity Bangladesh's Development Number of Transshipments and Status of Revenue Earnings Vessel Name Product Quantity (in MT) Revenue ('000 BDT) Berthing period Lead time (in days) (in days) MV Newtek 6 (BD) Iron Sheet and Steel 1004.4 193.1 17 27-28 MV Avi (IND) Rice 2272.5 436.8 13 22-23 MV Sumon 1 (BD) Rice + Iron Sheet/Steel 338.2+648.6 189.7 12 21-22 Total 4263.7 819.7 Few highlighting facts: • • • • Average berthing period at Ashuganj is 14 days Average turnaround time is 23-24 days At present, the port has no facility such as way bridge scale, scanning machine, crane, designated truck stand. In addition, covered van facility is also not available No permanent customs officer at the AIRP as well as in Angtihara boarder (Khulna) Godown (4,400 sqr. feet) facility is available, but remained unused till date Government has plan to charge for scanning, ICT (automation), merchant overtime and other administrative functions once these services will be installed CPD (2017): State of the Bangladesh Economy in FY2017 (First Reading) 42 52#53Independent Review of RBD Current State of Bangladesh-India Connectivity Bangladesh's Development Concluding Remarks 1 2 3 4 • Make use of the alternative paradigm of "Benefit-Sharing" as the core principle in negotiating connectivity and transit issues including fees and charges • Undertake the needed investments for developing infrastructure, logistics and trade facilitation to effectualise the connectivity • Consider wider implications while negotiating the service charges: issues of reciprocity, BBIN-MVA, guaranteed buybacks ● Design a comprehensive approach and framework to negotiating transit issues, service and user charges: not discrete, piecemeal, episodical and case by case approval CPD (2017): State of the Bangladesh Economy in FY2017 (First Reading) 53 33#54Independent Review of RBD Bangladesh's Development Remittances: Delving into Causes of Depressed Trend OFAMER UNITEDS CL76841714 A 10 CHARL CPD (2017): State of the Bangladesh Economy in FY2017 (First Reading) 54 52#55Independent Review of Remittances: Delving into Causes of Depressed RBD Trend Bangladesh's Development Global remittance inflow in 2016 projections ➤ LMICS: USD 442 bln (0.8% growth) ➤ South Asia: (-) 2.3% ➤ Bangladesh: USD 14.9 bln (0% growth) Remittance trends ➤ Jul-Dec FY17 growth: (-) 17.6%; Annual growth FY16: (-) 2.5% ➤ Monthly receipt went below USD 1 bln in Nov and Dec 2016 (Last experienced in Nov 2011) ➤ Growth slowed down to: Pakistan (-3.8%), Nepal (4.3%), Sri Lanka (0.9%); ■ Revived: in Philippines (3.3%) ➤ Remittance sending cost rose for 6 of 8 sending countries ■ From KSA, cost came down for all countries except for Bangladesh Migration trends ➤ Jul-Dec FY17: 28.2%; Annual growth FY16: 48.2% Highest outflow in Nov 2016: 81,483 (record highest since July 2008) ➤ Female migrant growth: (-) 12.5%; Annual growth FY16: 39.9% CPD (2017): State of the Bangladesh Economy in FY2017 (First Reading) 555 55#56Independent Review of Remittances: Delving into Causes of Depressed RBD Trend Bangladesh's Development Exploring the factors for the sharp decline in remittances Hypothesis 1: Increase in informal channel transfer Hypothesis 2: Economic slowdown in the GCC countries · • Hypothesis 1: Increase in informal channel transfer ☐ Economy is prone to fall into informal channel transfers, during ➤ Special situations: festivals and political instability ➤ Introduction of a new financial mechanism or policy changes ➤ Volatility in currency exchange rates All these changes may influence both money inflow to, and outflow from the economy CPD (2017): State of the Bangladesh Economy in FY2017 (First Reading) 56#57Independent Review of Remittances: Delving into Causes of Depressed RBD Trend Bangladesh's Development What Bangladesh economy experiences? ➤ Large difference between USD's bank rate and the curb market rate ➤ Supply shortage and high demand of cash USD ➤ Hoarding tendency: expectations of further appreciation of USD What are the consequences? ➤ Remittance transfer though formal exchange houses dropped by 50% in Malaysia ➤ Mainly small remitters resorted to informal channel transfer ➤ Hundi traders network expanded freely near every household ➤ Some of the mobile banking agents in Bangladesh may be involved ➤ In Singapore, Hundi traders have introduced scratch cards The same exchange houses do not find any such major problems when sending money to India or Nepal The above situation needs case by case investigation Bangladesh Bank relaxed some policy spaces – measures, until now, have proved to be inadequate CPD (2017): State of the Bangladesh Economy in FY2017 (First Reading) 57#58Independent Review of Remittances: Delving into Causes of Depressed RBD Trend Bangladesh's Development Hypothesis 2: Economic slowdown in the GCC countries Respective governments adopt austerity measures and scaled down government spending Witnessed a sharp slowdown in their GDP growth ➤ Nationalises labour market by replacing foreign workers Capital flight could also be a factor for lower remittance flow Remittances could be diverted from the country of origin to other countries Recommendations ➤ Cost of sending money should be reduced Better investment opportunities and benefits may be offered to both the diaspora and remitters Bangladesh Bank Committee to investigate malpractices on remittances needs to strengthen through involving experts and use of technology ➤ Regulatory measures and policy framework may be revisited. ➤ Reliable estimates of the migrant workers' stock should be there - coordination among Ministries, missions abroad, Wage Earners' Welfare Board (WEWB), immigration police is recommended CPD (2017): State of the Bangladesh Economy in FY2017 (First Reading) 58#59Independent Review of RBD Bangladesh's Development CONCLUDING REMARKS CPD (2017): State of the Bangladesh Economy in FY2017 (First Reading) 59 59#60Independent Review of RBD Concluding Remarks Bangladesh's Development Comfortable macroeconomic environment • Robust GDP growth and rebounded investment in FY16 • Low inflationary pressure • Declining interest rates • • Rising foreign exchange reserve Manageable fiscal deficit • Positive outcome in capital market Mixed performance • • Challenging budgetary targets ADP expenditure had recovered, but could not surpass the historical trend Favourable BOP, but current account balance in deficit • Export earnings growth started to decline • • • • Comfortable debt situation over the medium term, but need cautionary approach • Corrective measures for FFP Comprehensive approach in dealing with transit issues • Private investment Areas of concerns ⚫NSD sale biased financing mix of the budget deficit Rising NPL Weak governance amid new scams in Banking sector •Inadequate CAR Lower remittance inflow Institutional and policy reforms in the areas of revenue mobilisation, public expenditure management, financial sector and private investment will need to be rigorously pursued, if needed, by taking bold steps CPD (2017): State of the Bangladesh Economy in FY2017 (First Reading) 60 09#61Independent Review of RBD Bangladesh's Development Thank You CPD (2017): State of the Bangladesh Economy in FY2017 (First Reading)