Introduction

External assistance has played a vital role in the economic development of Bangladesh, assisting in bridging the internal gap (savings-investment gap) and external gap (export-import gap). The costs, risks and maturity structure related to external debt management analysis are important. The cost of external debt is low as the most of the foreign loans received are through the concessional window of IDA, ADB and Japan. The structure of maturity of the external debt of Bangladesh is composed of medium and long-term debt with an average grace period of 10 years and a repayment period of 20 years. With the shrinkage of share of grant aid in the external aid package in recent years, the volume of external borrowings is increasing which has resulted in a progressive increase of per capita debt obligation which stood at US$ 139.9 in 2006. From 1972 to 30 June 2006, a total of about US$ 53.93 billion of foreign assistance was committed of which about US $ 44.83billion of aid was disbursed. 44.74 percent of the disbursed aid was grants and 55.26 percent was loans. In 2007, Bangladesh received $1631 million as foreign economic assistance of which $1040 was loan while the amount of grant was $590, almost half of the amount received as loan. Aid is received from both multilateral and bilateral sources. The multilateral sources include World Bank (WB), Asian Development Bank (ADB), United Nations Development Programs (UNDP) and other UN organizations. The bilateral donors include individual countries.Since independence, Bangladesh has received highest amount of bilateral aid from Japan in terms of cumulative disbursement followed by USA. International Development Association (IDA) is the largest amongst the multilateral development institutions followed by the Asian Development Bank. IDA contributed 26.68% of the total aid disbursed in 2001-2007, followed by ADB. There has been a significant change in the composition of aid to Bangladesh over the years. The key features demonstrate the fact that the share of grants has been decreasing steadily over the past few decades.

Socio-Economic Indicators of Bangladesh (at a glance)

General Male-Female Ratio, Geographical Location/Characteristics Population Density/Sq. Km., 2009-10 990 2009 104

Location

200 34' & 260 38' North Latitude

Basic Vital Statistics

880 01' & 920 41' East Longitude

Crude Birth Rate (Per 1000 Population),

2009

20.54

Area (Sq. Km)

147570

Crude Death Rate (Per 1000 Population),

2009

6.02

Standard Time

GMT+6 Hours Infant Mortality Rate (Per Thousand Live Birth), (Below 1 Year of Age), 2009 41.26

Vital Statistics

General Vital Statistics

Health and Social Services 130.0

Population (Million),

2001 (Adjusted)

Persons Per Hospital Bed (Including Dispensary),

2009-10

3320

2009-10 (Estimated)

146.1

Persons Per Registered Physician, Literacy Rate of Population 11 +yrs (%),

2009-10

2762

Population Growth Rate (Percentage),

2009-10

1.32

2009

49.1

Gross Domestic Product (GDP), 2009-10 (Revised)

Total investment 25.0

25.0

Balance of Payments, 2009-10 GDP at Current Price (In billion Tk.) GDP at Constant Price (Base Year = 1995-96, In billion Tk.) 6923.8 (In Million US $)

3600.5

Export Earning

16205

Import Payments Export (As Percentage of GDP)

23738 16.2

GDP Growth at Constant Price (%)

5.83

Per Capita National Income (In Tk.)

51945

Import (As Percentage of GDP)

23.7

Per Capita National Income (In US$ )

751

Foreign Exchange Reserves (As on 30.06.2010)

10750

Per Capita GDP (In Tk.) Per Capita GDP (In US$)

47405

Workers Remittances

10987

685

Labour Force and Employment Monitoring of Employment Survey (MES),

Savings and Investment (Percentage of GDP, 2009-10 (Revised) Number of Civilian Labour Force (Crore)

2009

5.37 Male 4.02

Domestic savings

19.0

National savings

28.8

Female

1.35

Total Expenditure Percentage of Total Labour Force Agriculture Labour Industrial Labour Other Labours 48.4 Total Revenue (As Percentage of GDP)

1013.5

11.0

24.3

14.2

Total Expenditure (As Percentage of GDP)

14.5

Financial Statistics Year

Budget Deficit (Excluding Foreign Grants)

3.7

Total Number of Commercial Banks

47 State Owned Bank Specialised Bank 4 Money Supply (In billion Tk.)

Narrow Money (M1),

June, 2010

879.9

Reserve Money, Local Private Bank 30 Broad Money (M2), Foreign Bank 9

June, 2010

805.1

June, 2010

3630.3

Non-Bank Financial Institution

29

Government Revenue/Expenditure (Actual) 2009-10 (In billion Tk.)

Total Revenue

757.5

Bangladesh Economy: Current Scenario

The Bangladesh economy has experienced both macro-economic stability and robust economic growth following the transition to a democratic rule in the early of 1990s. In the backdrop of the deep macro-economic crisis of the late 1980s, a series of stabilization measures were introduced in the Bangladesh economy which largely restored macro-economic stability in the early 1990s. Subsequently, the Bangladesh economy registered an average GDP growth rate of 4.8 per cent in the 1990s, which was one full percentage point higher than that recorded in the previous decade (i.e. 3.8 per cent). Despite of such impressive growth throughout the decade, the per capita income of Bangladesh at the beginning of the new decade was not only the lowest among the South Asian countries, but also below the average per capita income of the least-developed countries (LDCs). Within the decade of the 1990s, the second half demonstrated an even more impressive growth performance (5.2 per cent, FY96-00) in comparison with the first half (4.4 per cent for FY91-95). The economy has grown 5-6% per year since 1996 despite political instability, poor infrastructure, corruption, insufficient power supplies, and slow implementation of economic reforms. Bangladesh remains a poor, overpopulated, and inefficiently-governed nation. Although more than half of GDP is generated through the service sector, 45% of Bangladeshis are employed in the agriculture sector, with rice as the single-most-important product. Bangladesh's growth was resilient during the 2008-09 global financial crisis and recession. Garment exports, totaling $12.3 billion in FY09 and remittances from overseas Bangladeshis totaling $9.7 billion in FY09 accounted for almost 25% of GDP. Socio-Economic Indicators of Bangladesh (at a glance) is shown in the Appendix.

Macro Economic Situation

The economy of Bangladesh continued to demonstrate satisfactory growth performance along with maintaining macroeconomic stability during FY2009-10 despite the global economic recession. The economy was provisionally estimated to have grown at a rate of 5.83 percent, slightly higher than the growth rate (5.74 percent) of FY2008-09. The key feature of the economic performance during FY2009-10 was the sustained growth in agriculture sector coupled with moderate growth in industry and service sector, which is shown in the graph. The share of services in GDP amounted to 49.88 percent followed by that of industry (29.88 percent) and agriculture (20.24 percent) at constant prices. Bangladesh was affected less by the slowdown in international trade than other emerging Asian Economies and has maintained strong economic fundamentals, including a sound fiscal stance. Since the beginning of the global economic crisis, the Government has been on a high alert and is monitoring its impact on the economy through a Task Force involving the concerned stakeholders from both the public and private sectors. After detailed examination in line with the recommendations of the Task Force, the Government has declared two incentive packages together with fiscal and monetary policy supports. A Technical Committee was also formed by the Ministry of Finance to monitor and analyze the macroeconomic impact of the crisis, and to identify necessary short-term macroeconomic and fiscal measures. The impact of the global financial crisis on Bangladesh economy was not observed at the beginning of the crisis. However, some weakening in export and import was observed in the last quarter of FY2008-09, which continued through the second quarter of FY2009-10. The export rebounded from the negative growth rate at the beginning of FY2009-10 and year-on-year growth of export gained remarkably since January, 2010. Revenue earnings grew at a satisfactory rate, remittances inflow maintained their steady growth while current account surpluses recorded its highest-ever level of US$ 3.73 billion and foreign exchange reserves crossed US$ 10 billion during FY2009-10. All these factors put the economy on a stronger footing in 2009-10. Agricultural and industrial term loans disbursement increased due to the implementation of various short, medium and long-term policies and strategies by the Government to boost up investment. Along with the increase of private sector credit flow, increase in import of industrial raw materials and capital machinery indicates that the economy is moving towards a positive direction. The per capita national income (GNI) exceeded US$ 700 mark for the first time. The per capita GNI and GDP stood at US$ 751 and US$ 685 respectively

during FY2009-10. The trend of GDP is shown through the graph. The GDP, GNI, Per Capita GDP and GNI at current market price for the years 2005-06 to 2009-10 are given in the Appendix. With the recovery of global economy, domestic demand is on the increase in many countries. This has resulted in unexpected price escalation in international commodity markets creating upward pressures on inflation in many countries. The price of crude oil, which fell below US$45 per barrel at the beginning of 2009, doubled by June 2010. As a result, inflation was on an upward trajectory since June 2009. The year on- year inflation reached at 8.70 percent in June 2010 from 2.25 percent in June 2009. The average inflation rate, therefore, rose to 7.31 percent in FY2009-10 compared to 6.66 percent in the previous year. Food inflation rose to 10.88 percent in June, 2010 from 0.25 percent in June 2009, contributing mainly to the rise in overall inflation, while non-food inflation decreased to 5.24 percent from 5.94 percent in June 2009. During FY2009-10, urban inflation (8.57 percent) showed slightly downward trend compared to rural inflation (8.74 percent), mainly due to the price hike of food items. The Government has taken several steps to check this upward trend of inflation and also to keep the prices of essentials within the reach of the consumers. Along with the initiative of augmenting domestic production and ensuring smooth supply of commodities, measures have been taken for market monitoring, open market sale of essential commodities, and ban on hoarding. Side by side, Bangladesh Bank has raised the Cash Reserve Requirement (CRR) and Statutory Liquidity Ratio (SLR), two monetary policy instruments, both by 0.5 percent from 5 percent and 18 percent respectively to check inflationary pressure due to excess liquidity in the banking system. Consumer Price Index and inflation during FY 2005-06 to FY 2009-10 are shown in the Appendix. The macroeconomic developments in the first half of the 1990s were demonstrated the high degree of frailty of the economic stabilization process in Bangladesh. Slippages in macroeconomic management, poor harvests and political unrest have combined to bring about deterioration in the macroeconomic balances. But now the current economy of Bangladesh is estimated to have grown at a rate of 5.83 percent, slightly higher than the growth rate (5.74 percent) of FY2008-09.

The economic performance during FY2009-10 was the sustained growth in agriculture sector coupled with moderate growth in industry and service sectors. The export rebounded from the negative growth rate at the beginning of FY2009-10 and year-on-year growth of export picked up remarkably since January 2010. The satisfactory growth in revenue mobilization, higher growth in remittance inflow, current account surplus of US$3.73 billion and foreign exchange reserves of US$ 10 billion put the economy on a much stronger footing. In tandem with these, growth supportive monetary policy, widening of social safety-net and different policy supports, contributed to the process of achieving sustainable economic growth. Implementation of different programmes in social sector resulted in remarkable reduction of maternal and infant mortality rate including malnutrition. Besides these, higher average life expectancy, expansion of female education, narrowing down the gender disparity in education was other achievements widely acclaimed by all. All these contributed to improvement of Human Development Indices. Moreover, in line with the targets set out in Vision 2021, the Government has prioritized the development of some crucial sectors especially power and energy, agriculture, transport and infrastructure. Successful implementation of these programmes will ensure greater welfare of the community at large.

Foreign Aid: Definition

Foreign Aid any capital inflow or other assistance given to a country which would not generally have been provided by natural market forces. In Bangladesh, foreign aid serves to bridge the gap between savings and investments and make up the deficits in the Balance of Patment. Foreign aid is a major means of financing the country's economic development. Economic literature generally classifies foreign aid into four main types. First, the long-term loans usually repayable by the recipient country in foreign currency over ten or twenty years. Secondly, the soft loans repayable in local currency or in foreign currency but over a much longer period and with very low interest rates. The softest are the straight grants often given to the less developed countries. Sale of surplus products to a country in return for payment in the country's local currency. Foreign aid is essentially economic aid and is provided on a governmental basis. In Bangladesh Foreign Aid includes: loans received on concessional terms grants

Excluded from the category are: Fund transfers in the form of military assistance Aid provided by foreign private agencies Suppliers credit Export credit, Foreign portfolio investment Foreign direct investment

Hard-term borrowing with an interest rate of 5% and above and/or a repayment period of less than twelve years.

The donors of foreign aid to Bangladesh include Individual countries (Bilateral Aid) Multinational financial institutions and international agencies and organizations (Multilateral Aid) Foreign aid to Bangladesh is classified on the basis of terms and conditions, source, and use. Accordingly, the various types foreign aid are: Loans and grants Bilateral aid and multilateral aid food aid, Commodity aid, Project aid technical assistance.

Food Aid: Food aid is the supply of food from the donor countries and organisations or payment to suppliers of food to Bangladesh by them. Donor payments of costs associated with food supply such as transport, storage, distribution, etc. are also considered as food aid. Commodity Aid: Commodity aid represents donor funding of the acquisition of commodities including consumer items, intermediate inputs and industrial raw materials. Major commodities imported into Bangladesh under commodity aid programmes are edible oil, seeds, fertilizers and chemicals. Sale of food and commodities imported under aid arrangements generates a counterpart taka fund in the government treasury. Projects or activities implemented with the help of that fund also fall under food or commodity aid program. Project Aid: Project aid is the provision of grants and loans for the financing of project costs. It also finances the import of equipment and commodities related to projects. In Bangladesh project aid relates to a large extent to the financing of projects included in the Annual Development Program(ADP). Technical Assistance: Technical Assistance, often seen as a part of project aid refers generally to foreign aid for the improvement of the institutional capacity, transfer of

technology, import of expertise (foreign consultants and technicians), and development of human resources by providing training facilities, including foreign fellowships. The emergence of Bangladesh as an independent state was accompanied by a devastation of the economy. In the very early years of independence, the country's industrial production had almost come to a halt, agricultural output had declined and the normal trading activities had virtually ceased. Without the help of the international community and massive inflow of foreign aid, it was almost impossible for the new nation to survive. Bangladesh started receiving foreign aid largely in the forms of food aid and disaster relief. Aid inflows gradually increased with growth in the country's development needs and along with the increase in volume, the aid became diversified. Project aid comprises the largest share of foreign aid inflows into Bangladesh. On an average, the major share of the annual project aid is received as loan and the rest as grants. ADB, IDA, IFAD and OPEC are the major multilateral project aid donors and Japan is the single leader in the list of bilateral ones. Worth mentioning among others are France, Saudi Arabia and China. The leading food aid donors include the UN system (mainly, World Food Programme), the USA, EEC/EU, Canada, Japan and Australia. Commodity aid has been used in Bangladesh to meet the gap of balance of payments and also to generate local currency in the form of counterpart funds for financing development. Major commodity aid donors to Bangladesh include Japan, Germany, Netherlands, UK and USA. Over the years the share of food and commodity aid in the total foreign aid to Bangladesh declined, while that of project aid including technical assistance experienced a substantial increase. A special group of the recipients of foreign aid in Bangladesh is the Non-Government Organizations. They are receiving increasingly large amount of funds from donor agencies and organisations. These funds are almost exclusively grants and are channeled through the NGO Affairs Bureau of the government. Most major donors of foreign aid to Bangladesh are now members of an Aid Consortium, often referred to as the Aid Group, which meets every year to review developments in the economy of Bangladesh and to pledge aid according to the judgements on its aid requirements. Members of the Aid Group include Australia, Belgium, Canada, Denmark, France, Finland, Germany, Italy, Japan, Netherlands, Norway, Sweden, Switzerland, UK, USA, IDA, ADB, EU, IFAD, UN agencies, the Ford Foundation and Asia Foundation. Non-Aid Group donors of foreign aid to Bangladesh include China, India, Kuwait, Pakistan, Saudi Arabia, South Korea, Spain, UAE, the IDB and OPEC.

Foreign Aid Flow: Commitment & Disbursement

Necessity of Foreign Loan in Bangladesh

To meet Budget Deficit

There are three types of budget: Surplus Budget (Revenue>Expenditure) Balanced Budget (Revenue=Expenditure) Deficit Budget (Revenue<Expenditure)

Bangladesh, being a low income country where Government spending is a must for economic development, and where revenue generation through taxation is not enough to cover the expenditure on the budget, meets a deficit budget each year. To fund such budget deficit, GoB takes two sources of funding: Foreign Loan Domestic Debt

Therefore, it is clear from the above chart that, the difference between budget expenditure and revenue receipt denotes the total amount of Internal/Domestic Debt and External Debt of the Government. It is also clear from the chart that, from the FY 2005-06 to date, total domestic debt has increased more than that of foreign loan and also revenue collected as tax and non-tax items.

To Fund Development Projects

ADP stands for annual development programme which is an organized list of projects in various sectors. The ADP is prepared on the basis of the year's development budget approved by the parliament. Bangladesh's annual development program (ADP) has been moving ahead slowly due to lack of coordination and proper policy guidelines. Moreover the reasons for the lower speed of project implementation also include delay in preparation and approval of projects, lack of human resource and interruption in appointment of project director, consultants and decision of tender documents for procurement and difficulty in acquisition of land. The government has a practice of revising the ADP every year. Sometimes, the government changes the ADP by inclusion of new or exclusion of some listed projects in the middle of the year. The causes for revision includes delays in approval of projects, procurement related problems and shortage of taka counterpart fund for the projects. Expected level of economic growth, physical and social infrastructure development and employment generation are the main issues to prepare and implementation of ADP. Poor ADP implementation leads to lower growth rate with limited scope to employment generation. Cost and time overrun will increase the size of ADP as well as increase social cost. In the case of aided project, longer implementation period have high rate of interest and add to more repayment schedule. ADP consists of projects in different economic sectors and each ministry sets priorities to implement their own projects. There are two approaches for implementation development

projects namely, programme approach and project approach. But all best practices are not fit everywhere. Many countries implement their development issues through projects and some countries implement this as programme approach. In Bangladesh, we have both project and programme approach to implement ADP. ADP has different projects which are executed by Ministries/Divisions/ Agencies. There are lots of activities that are proposed to be implemented by the authorities.

For a long time, the major portion of spending for various development programs come from foreign development partners-both bilateral and multilateral. Loans used for Annual Development Program purpose can be of three types: Miscellaneous foreign loan Special Support Project aid

From the above bar chart we can see that Project aid accounts for major share of the development funding for Bangladesh.

Need to be Self Sufficient

First Domestic resources provide a predictability of resource flow to make allocations for the medium term fiscal planning in a country. As poor countries tend to rely on foreign aid they also have to face the impact of volatility and uncertainty in aid flows which creates difficulty in their budget management. Even countries which have graduated themselves from aid dependent to trade dependent countries may also face such volatility and unpredictability. Second Adequate domestic resources create fiscal space for the country to priorities its spending in line with the policy priorities and political commitments. It also gives flexibility as opposed to conditionalitys of aid. Third The need for broadening the tax base as a source of domestic resource mobilization in the country is important also because of the fact that in order to attract foreign investment countries

have to provide generous tax incentives to foreign investors to be competitive in the global market. The reduction in corporate tax necessitates resource generation through the broadening of tax net. Fourth Domestic resource mobilization through taxation is crucial for creating the sense of participation among people in the development process of the country. This can in turn act as a mechanism to create pressure on the public representatives to be accountable and transparent on the use of resources. Self- Sufficiency: Bangladesh The above arguments in favor of domestic resource mobilization are also applicable for Bangladesh to a large extent. Bangladesh has been enjoying a steady economic growth and notable improvements in social indicators. Some Recent Macroeconomic Strengths of Bangladesh: Growth Performance: A notable turnaround of the manufacturing sector (backed up by the export-oriented enterprises), strong performance of the crop sector, and anticipated momentum in public investment contributed to a high projection of 6.7 per cent of GDP growth by the BBS for FY2010-11. A recovering global economy with attendant prospects of robust performance by the countrys export and linked sectors was also a reason that informed this optimistic scenario. Indeed, if this turns out to be actually the case, the estimated GDP growth rate for FY2010-11 would be the highest ever achieved in post-independence Bangladesh. What is also remarkable is that, this high growth rate would have been achieved over the relatively high benchmark of 6.1 per cent in FY2009-10.

The impressive GDP estimates, however, are provisional and are likely to be revised. Actual growth performance would hinge on two critical factors: (a) robustness of investment projections, particularly of public investment based on the revised ADP when the GDP estimates for FY2010-11 were prepared, and (b) estimates of growth of the manufacturing sector which, in

view of information on the actual performance over the first six months, appeared to be rather optimistic. As is known, even the reduced RADP could be implemented only to the tune of 91.5 per cent. Export was robust: Exports showed remarkable turnaround in FY2010-11 having experienced the adverse consequences of the global economic slowdown in FY2009-10. Bangladeshs global export in FY2010-11 posted a high growth of 41.5 per cent against only 4.1 per cent growth in FY2009-10, with both RMG and non-RMG products registering significant growth rates of 43.4 per cent and 35.1 per cent respectively. Robust export performance helped maintain a foreign exchange reserve of USD10,911.6 million at the end of FY2010-11, which matched the corresponding reserve levels at the close of FY2009-10 (USD 10,749.7 million).

However, the attained growth was achieved over a low benchmark growth of FY2009-10, and could, prove difficult to sustain in FY2011-12. An important aspect of the impressive export performance in FY2010-11 was that along with growth in the volume of exports, average prices in the global market also appear to have posted some rise. For example, growth rates in terms of export volume for knit and woven- RMG were 19.0 per cent and 20.0 per cent respectively in FY2010-11, which would imply that price indices have also seen significant rise. However, rise in prices also reflected a significant increase in cost of production particularly in view of high cotton prices in FY2010-11. Collection of tax revenue strengthened: In continuation of its commendable efforts in the recent past, the National Board of Revenue (NBR) has achieved a significant 27.2 per cent revenue growth in FY2010-11, far outpacing (by Tk. 6,502 crore) the targeted growth rate of 16.8 per cent. Impressive growth rates were achieved for most of the components, particularly in case of income tax component (32.4 per cent). In the non-NBR tax component as well, an impressive 17.7 per cent growth was recorded in FY2010-11. Although this was lower than the annual target of 25.8 per cent, this is a significant improvement in view of the low growth of 3.4 per cent achieved in FY2009-10. Turnaround in manpower export: Significant slowdown in the outward migration had emerged as a major concern for Bangladesh in FY2009-10. The adverse impact of this was quite

obvious, particularly from the perspective of foreign exchange earnings, domestic employment situation, poverty alleviation efforts and forex reserve situation. As may be recalled, the number of people going abroad for jobs declined from about 6.5 lakh in FY2008-09 to 4.3 lakh in FY2009-10. It was somewhat of a relief that the decline appears to have been arrested in FY2010-11: as a matter of fact, the number of migrant workers leaving the country marginally increased to reach 4.4 lakh in this year. However, growth in remittance earnings further slowed to single digit (6.0 per cent) in FY2010-11 from the robust 13.4 per cent recorded in the previous year. In spite of some of the positive achievements relating to a number of important macroeconomic performance indicators, several disquieting fault lines began to appear in the economy as FY2010-11 approached its finishing line. Inflationary momentum continued to sustain, overall balance of payments position went into a negative terrain, burden of subsidies started to pick up significantly, particularly in the backdrop of operationalisation of (quick) rental plants, and bank borrowings were rising as a consequence of lower utilisation of foreign aid and higher unplanned public expenditure. Sustained moderately high growth with macroeconomic stability, which was the hallmark of Bangladeshs economic performance during the last decade, came under serious threat as the economy moved towards FY2011-12. Debt/GDP Ratio: Bangladesh has also reduced its dependency on foreign aid by a remarkable rate since its independence.

Starting from the post-liberation time to date, Bangladesh have been dependent on foreign loan and grants for a variety of reasons. However, the dependency is decreasing. Not in terms of debt itself, but in terms of Debt/GDP ratio. This may have two meanings; one is that, though foreign loan is increasing, GDP of Bangladesh is increasing at an even higher rate, and as a result the ratio of total external debt to the countrys GDP is gradually decreasing, and the second is that, though the GDP is growing at a constant rate the inflow of foreign loan is gradually decreasing. We know that the second one is the case for Bangladesh. Foreign loan inflow is decreasing every year. The decrease is notable from the mid nineties.

This is a sign of hope. A country that can increase its GDP with decreasing level of foreign loan inflow is not highly dependent on external debt. The country has all the potential to go even without loan from aid agencies, after it has reached a certain position. Galloping Debt Burden: As we can see by looking at the chart, debt burden of Bangladesh is ever increasing. Starting from the FY1971-72 upto FY 2007-08, external debt has been increasing , at a fluctuating rate. Total debt outstanding for Bangladesh is increasing, though Bangladesh is using a lot of foreign currencies each year to pay off the interest on those loans. A major portion of what Bangladesh brings in as foreign loan is being used to pay off interest, as shown by the second chart.

The figure clearly shows that over the years Bangladesh has been continuously paying off debt (interest and principal) only to have yet increasing debt burden. The gap between servicing of debt and debt outstanding id increasing, showing the countrys increasing inability to pay off debts

Aid Dependent To Self-Sufficient

By Increasing Domestic Borrowing

As we have already seen in the macroeconomic review of the country, major portion of the budget deficit is now financed with domestic borrowing. This can be of two types:Bank Borrowing and Non-Bank Borrowing.

Indicators Number of banks Number of Branches Interest Rate(%) Deposits Advances Bank Rate

197 5 12 161 1

1980 20 3820

1985 21 4943

199 0 24 553 9

1995 31 5813

2000 49 6065

2005 49 6412

2008 48 6886

3.5 11.3 8.00

4.3 11.0 10.5 0

80.1 14.5 11.2 5

9.1 14.8 9.75

4.86 12.2 2 6.00

7.21 13.8 6 7.00

5.62 10.9 3 5.00

6.95 12.29 5.00

With the increasing number of banks in the country and flourishing Financial and banking sector, more and more banks are bow capable of lending to the GoB. Though this creates Crowding out effect for private investors, with increasing efficiency of the banking sector, and increase in

bankable customers over the years, banks will be able to generate more fund and be a good a major source of Fiscal financing.

Fund Collected Through Sovereign Bonds The government has set up a seven-member committee to find ways to float sovereign bonds in the international market to ease pressures on the balance of payments, the country's accounting record. Members of the committee include representatives from Bangladesh Bank, National Savings Directorate, Policy Research Institute (PRI) the finance ministry and managing directors of Sonali Bank Ltd. and Trust banks. The government plans to float sovereign bonds to the tune of $500 million in the international market. Two foreign banks have already submitted proposals to the finance ministry. The committee's other responsibilities include studying the availability of credit in international markets and recommending interest rates. The committee has also been told to redesign premium bonds for expatriate Bangladeshis and recommend whether the interest rates against the savings certificates should be adjusted upward or not. Bonds issued by national governments in foreign currencies are normally referred to as sovereign bonds or debt instruments. In December 2011, BB gave a set of recommendations to the government in favour of floating sovereign bonds, after the central bank's board of directors predicted that the BoP could become a major headache in the coming days. The central bank also wrote that the government can take long-term credit at low costs by issuing the bonds. It also mentioned some negative aspects of the bonds. It said at the time of repayment of loans in foreign currency, the country may face pressures due to a devaluation of the local currency. Bangladesh is launching sovereign bonds for the first time in the international market.

Public Private Partnership PPP initiatives are by now a widely adopted mode of physical infrastructure investments in both developed and developing countries. Recent worldwide heightened concerns aboutsustainability of public debt levels in advanced economies indicate that PPPs are likely to be the dominant mode of infrastructure investments in the coming years everywhere. The development strategies

and investment programmes of Bangladesh government already include PPP as a major role in much needed new infrastructure investments". Private sector power generation policy in 1996 introduced Public Private Partnership (PPP) in Bangladesh. In 1998-99 two mega power plants development initiatives were taken involving private sector. In 2004, government issued Bangladesh Private Sector Infrastructure Guidelines (PSIG) and established a national committee Private Infrastructure Committee (PICOM)" for promoting and progressing private infrastructure projects under PPP. In 2007, the Bangladesh Bank (BB) launched the five-year-term Investment Promotion and Financing Facility (IPFF) project with US$50 million fund provided by the World Bank through public-private partnership (PPP) for developing captive power plant, port, internal container terminal, highways & expressways, airports and water supply & distribution. In 2008, policy to promote private sector participation in power sector was formulated. In 2009, government formally incorporated PublicPublic Partnership expenditure heads to the National Budget to facilitate new projects under PPP during 2009-10 financial years. In Bangladesh, PPP projects are classified into the three groups in terms of total investment excluding on-going capital for expansion: Large Project (investment above BDT 2.5 billion), Medium Project (investment between BDT 500 million and 2.5 billion) Small Project (investment below BDT 500 million).

Government is expected that PPP will cover 18 sectors including energy, power, fertilizer, port economic zones, e-service delivery, and poverty alleviation projects. The installation of a 245 MW power plant is underway on Built, Own, Operate (BOO) basis with public-private joint investment under the supervision of the Rural Electrification Board to mitigate power shortages. In addition, IDCOL (Infrastructure Development Company Limited) has installed solar power systems with a capacity to generate 45 MW electricity in nearly one million households and business enterprises till April, 2011. The company has planned to install 2.5 million solar power systems with a capacity to produce 125 MW of electricity by 2014. The Chittagong Port Authority has invited private sector participation to operate a newly developed container terminal

and general cargo berths, on a Supply-Operate-Transfer (SOT) basis. On July 20, 2011 the Government has decided to build the second Padma bridge on a 'Built, Own, Operate & Transfer (BOOT)' basis under a 'Public Private Partnership' (PPP) project. Government decided to develop the security system at Hazrat Shahjalal International Airport as well as two incomplete jetties at the Mongla port under the PPP. On the other hand, government also showed efforts for reducing dependency on the private sector, especially on power sector. Government considers that more power plants should soon be set up in the public sector to help reduce dependence on the private sector. To achieve this, the government has approved setting up of seven power plants partly with hard-term loans (foreign suppliers' credit) to lessen the pressure on foreign exchange reserve and lower dependence on the private sector. All PPP projects will receive Tax exemption or reduced tax on import and profit from operating/managing for a specific time period under PPP projects. PPP projects targeted for rural or/and underprivileged population may get special unique incentives. Special incentives may be given to non-resident Bangladeshis (NRBs) to invest in PPP projects. The Government took initiatives to attract private investment from domestic resources and Foreign Direct Investment (FDI) in major infrastructure sectors like power, energy, roads and railways through the PPP process. To strengthen PPP initiative and attract investment from home and abroad, the government has created Bangladesh Infrastructure Finance Fund (BIFF) which is expected to commence its function in FY 2011-12. In Bangladesh, several International Development Agencies are already boosting financial support and technical advice on PPP as a modality for development cooperation, including both ODA co-funding and other types of financial support such as equity, loans and guarantees provided by development finance institutions. For example, DFID is giving 13.5 million to the World Bank's Bangladesh Private Sector Development Support Project, through which the bank is lending the Government of Bangladesh $120 million to develop more Export Processing Zones (EPZs) across the country. The Japan International Cooperation Agency (JICA) is very receptive about participating in the governments public-private partnership (PPP) projects using a hybrid model Dhaka Chamber of Commerce and Industry (DCCI) implemented the automation project for the National Board of Revenue (NBR) under the publicprivate partnership (PPP)

programme and technical assistance from a private IT firm, Datasoft. The cost for documentations has also come down to Taka 50 for each service while Taka 180 was charged for the same job under the previous system. The World Bank and the Asian Development Bank (ADB) are the key drivers for promoting public-private partnership (PPP) in Bangladesh. The rise of International Financial Institutions guided public-private partnerships (PPPs) envisages that government is inclining towards markets. The government of Bangladesh is keen to provide various fiscal and non-fiscal incentives to the private investors for launching PPP projects in priority sectors. We have already successfully used the PPP concept by setting up KAFCO urea fertilizer factory and other projects like New Muring Container Terminal in Chittagong port, modernization of land ports at Shatmasjid, Banglabandha, Hili, Bibir Bazar and Birol Bangladesh needs huge investment to achieve 8 to 10 percent economic growth in future and Public Private Partnership (PPP) initiatives could be the best option for it. Unless investment is raised from the present level of 25 percent to Gross Domestic Product (GDP), how we do expect 8 to 10 percent economic growth. For achieving the target of growth, there is a need for creating assets where the PPP models can play an import role and PPP could be a good option in developing land ports, sea ports, river ports and highways. PPP is doing very well despite some pessimistic comments, To implement the PPP concept, we need to educate the private sector, government servants and policy makers. PPP initiatives must cover key areas like health and education and development of infrastructural sector. The government has decided to include small and medium projects in the public private partnership (PPP) scheme targeting to finish those by the end of its tenure, official sources said. Meeting documents show that at present some 13 projects under the PPP scheme are under implementation or remain at a very initial stage,some of which are: The Gulistan-Jatrabari flyover project Software Technology Park at Janata Tower in Karwan Bazar Dhaka-Ashulia elevated expressway Second Padma multipurpose bridge project. Elevated expressway from Golap Shah Shrine to second Buriganga Bridge

tourist resort and exclusive tourist zone in Teknaf and an international standard tourist centre in Cox's Bazar Deep seaport at Sonadia of Cox's Bazar under the PPP scheme.

Specialised hospital in Chittagong port area in joint collaboration with an Indian hospital.

Through Tax Collection

The revenue collection is an important indicator to identify the economic stage of a country. The stronger the economy, the higher the level of the revenue it receipts. Therefore, both tax and nontax revenues have a significant correlation with the share in GDP. Total revenue comes from two sources-tax revenue and non-tax revenue. Tax revenue again can be either NBR or non NBR revenue. The revenue collected the National Board of Revenue (NBR) consists of the major portion of tax revenue of the country each year. As one of the major sources of tax revenue, NBR revenue has a larger share in tax revenue compared to non-NBR revenue. As one of the most important Non-tax revenue, VAT is considered. Value Added Tax (VAT) was introduced in Bangladesh since 1 July 1991. Mainly, VAT is imposed on goods and services at import stage, manufacturing, wholesale and retails levels. The revenue collection from VAT and income tax has increased in large quantity than any other components of NBR revenue over the years. Moreover, in Bangladesh, VAT has increased more than that of taxes on income and profits. In Bangladesh, budget financing can not only be met by total revenue earnings of the country rather also depends on domestic borrowing and foreign aid as well. With the vertical drift of total expenditure over the years, the government has to depend on domestic borrowing for budget financing more than revenue earnings. However, the satisfactory performance of revenue collection over the years increase hope that if successful implementation of revenue collection procedure is done, dependence on foreign loan can come down to a great extent.

As we can see from the above graph, the total revenue trend is increasing, while a major share of the revenue is the tax revenue. As a result, a more vigilant and fair tax policy will ensure that our country collects a major share of the budgeted revenue from tax, and also from non-tax revenue. Recent measures taken by GoB to increase Tax Revenue: The government is determined to increase almost all tax rates falling under non-tax revenue and non-NBR tax revenue to increase the income of the government and cut its budget deficit.The government fixed the target of Tk 226 billion under the head of non-tax revenue and Tk 39.14 billion from non-NBR tax revenue for the current fiscal year. The government has undertaken a move to amend the Stamp Act, 1899 to help increase the tax rates for over 100 types of heads falling under the category of 'non-NBR tax revenue' The rates of most non-tax revenue and non-NBR revenue stamps were set in 1973 Some items are stamp tax, affidavit fees, tax on power of autonomy, revenue stamp, and stamp of vendor license fees.Under the move, an 11- member committee has been formed last week to propose amendments to the existing Act. Senior official representatives from the ministries of finance, commerce, law, home and information have been included in the committee. An Additional Secretary, Internal Resources Division of MoF, has been made convener of the committee. The committee will submit its report by the end of the current month proposing rate hikes for different non-NBR tax revenue, a top Finance Ministry official said. Finance Ministry officials said they cannot increase tax rates of the over 100 heads without amending the Stamp Act, 1899. The major heads falling under the same act include duty on bond, debenture, sea insurance, tax on mortgage or settlement, debt transfer, ad valorem duty on stock and securities, ad valorem duty on conversion of Taka into any foreign currency and tax on adhesive stamps, etc. The Finance Ministry official said they would soon increase the existing taxes of a number of heads falling under 'non-tax revenue'. The proposed increase will take place through an administrative order.The heads include vehicle registration fee, vehicle fitness fee, land certificate fee, land registration fee, mutation fee, land development fee, bridge toll and narcotics tax. The National Board of Revenue (NBR) achieved more than 16 per cent growth, compared to

that of the previous year, in the first half of the current fiscal, which was 27 per cent in that period last year. The income tax wing has achieved growth by 26.06 per cent, while VAT 13.97 per cent and customs 12.03 per cent compared to the same period in the previous year. In July-December 2011, income tax earning growth was 34 per cent while VAT 31 per cent and customs 13 per cent.Officials said the NBR was hopeful of achieving the target for the current fiscal, despite the economic slowdown. Income tax collection will increase in the current fiscal due to enhanced monitoring efforts. The government has laid more emphasis on increasing income tax collection as only the direct tax can ensure social equity for the country.The NBR has moved to conduct field and physical audit in each and every sector by forming small groups to find out people who have concealed actual wealth information to evade tax. Customs and VAT collection mainly depends on import of goods that has marked a sluggish trend during the last few months. A senior customs official said the declining trend in the overall import activities had affected customs revenue collection.NBR collected Tk 2.25 billion in tax from the other sectors, including travel tax, in the first half of the current fiscal year.

Possibility in Becoming Self- Sufficient

There is huge possibility for Bangladesh to become self-sufficient in near future, though it is not possible for the current situation. The increase in consumer prices that started in FY10 continued through the first nine months of FY11, driven largely by a double-digit rise in food prices. We will be facing bop deficit and pressure on foreign reserve, thus requiring to borrow from abroad.

The external current account surplus has narrowed and reserves have declined, both exports and imports rose in the first part of FY2011 while remittance growth fell sharply, thus narrowing the external current account surplus. Taka has been further devaluated, inflation soaring. Import of fuel for the power plant will put further pressure on our Bop. So, we will require Foreign Loan.

Total expenditures are projected to remain broadly in line with what was set forth in the FY11 budget, although the composition of expenditures has changed. Growing food imports have put pressure on the budget, leading to slightly higher expenditures on subsidies and transfers. Annual Development Program (ADP) and non-ADP capital spending combined is likely to be about 1.5 percentage points of GDP lower than budgeted. ADP composition has a major portion to be financed by foreign loan, and implementation is yet not up to expectation.

The soaring inflation and underdeveloped and fluctuating capital market will deter investors from investing, either directly or through PPP. Also political instability deters investors in investing in the country.

Lack of vigilance and corruption in the income tax department helps large income earners to get away by not paying tax. Bringing such people/organizations under tax system can increase revenue to a great extent.

Bureaucratic tangles hamper full implementation of ADP fund. Almost 1/3 of the total budget comprises of projects that has no economic contribution. Avoiding such projects by fair budget planning and implementing is necessary.

Recommendation

1. GoB should take proper step to reduce budget deficit by achieving self-sufficiency in food, by diverting more subsidy to the agricultural sector. Also, funds from defense can be diverted to agricultural sector. 2. Corruption within income tax department should be reduced. 3. Bureaucratic tangles in fund disbursement for various development projects should be taken care of 4. Proper channeling of remittance should be ensured. 5. Capital market should be properly regulated. 6. Harmonization with aid partners is necessary, so that conditions imposed are in line with development goal of the country. 7. ADP implementation and economic development are synonymous concept in development process. There are some factors which may recommend to proper implementation of ADP in Bangladesh and thus reduce ADP fund requirement. These are: ADP implementation should be proper and there may have less flexibility of revision of ADP. Some projects are national priorities and it may implement under ADP in block allocation without disturbing the main ADP. Fiscal year needs to be change for proper ADP implementation in Bangladesh and avoid rainy season as starting point of fiscal year (i.e July).

Approval of the project should be in due time and proper preparation of DPP and need to modify even in initial stage is utmost necessary.

Release of fund in time, adequate allocation of fund and in lining up / allocation and reimbursement of foreign aid should be the high priority of the initial stage of the project.

All sorts of building materials, land, power supply, procurement, customs clearance and other utilities should be ensured at the time of implementation of the project.

Proper and timely decision and supervision and control by agency, coordination and cooperation among departments should be monitor in time and proper way.

Strengthening the Planning wing of the Administrative Ministries is almost urgent for success of any project. Compulsory feasibility study is needed for large social sectors projects also. Involvement of representatives of local people in project selection and stopping of misuse of project vehicles and equipments from within and outside should be closely monitored. Use of project implementation techniques by the project management should be enhanced and to realize the cost of the projects from the beneficiaries point of view is really essential to observed.

Timely recruitment and training of manpower of a project to strengthening of the ERD with combination of relaxation of rules/ regulations should be ensured. Appointment of a full time Project Director right from the project preparation stage is always to be required.

Conclusion

Discarding foreign loan is not possible for Bangladesh in the current situation, but it can of course be selective. Bangladesh is no longer in a position where it can not push itself forward without foreign loan. However, it is surely at a transitional period. Domestic fund diversion towards fiscal deficit financing can cause serious crowding out effect. Import growth and increasing development budgets are inevitable, and for that foreign loan is necessary to reduce pressure on domestic fund. However, aid remains less effective in Bangladesh because, firstly, donors of Bangladesh lack capacity to implement their commitments. The monitoring process requires considerable capacity of both donors and partners as a result of the high transaction costs. Donors are not moving fast towards aligning more generally with country systems. There is a disconnect between headquarter rhetoric and policies and actions on the ground. Secondly, the level of participation of civil society in the global aid debate has been traditionally very low. Such participation should also be ensured at the national levels by the partner countries. Although the involvement of national governments is critical, this must be broadened out to include civil society, which is in many ways a real ally on a number of key issues within the discussions. Thirdly, aid effectiveness is not isolated from development effectiveness. In addition to improved capacity and inclusion of all stakeholders a good deal of political interests and commitment at the highest level is also required in order to achieve the goal of aid effectiveness. However, the ultimate aim must be development effectiveness, and this must be seen in broader terms, emphasizing social justice and not just growth.