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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Report No Bangladesh: Economic and Social Development Prospects (In Four Volumes) Volume 1: Executive Summary April 2, 1985 South Asia Programs Department FOR OFFICIAL USE ONLY U~~~~~~~~~~ Document of the World Bank This report has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without Wlorld Bank authorization.

2 CURRENCY EQUIVALENTS The external value of the Bangladesh Taka (Ti) is fixed in relation to a basket of reference currencies, with the US Dollar serving as intervention currency. Tne official exchange rate on February 28, 1985 was Tk buying and Tk selling per US Dollar. Unless noted otherwise, the rates shown below have been used throughout this report: US$ 1 = Tk Tk 1 = US$ Tk 1 million = US$ 37,736 The average annual exchange rate for recent fiscal years is shown in Statistical Appendix Table 6.1. WEIGHTS AND MEASURES I acre (ac) = hectare (ha) 1 maund (md) = pounds (lbs) = kg 1 seer (sr) = pounds (lbs) = kg I cubic foot per second (cusec) = cubic meter per second I umcf = 1 million standard cubic feet ADMINISTRATIVE STRUCTURE Old New Union 6-12 villages Union Thana (Police Station) 6-15 unions Upazila Subdivision 5-12 thanas District (Zilla) 1-6 Subdivisions/12-30 Upazilas Zila (District) Division 5-7 Districts FISCAL YEAR (FY) July 1 - June 30

3 FOR OFMCL USE ONLY T1TLKE : ISDlSSII: 5ECONOMIC AND SOCIAL DEVESOPMET PROSPECTS COUNTRY BNDE legic : SOUTH ASIA SECTol : countm ECONOMIC REPORT TYPE CLASSIF 1Y LANGUAGES 5409-BD C1Z Restricted English PUBDhI: 8504 ABSTCT: The Country Economic Memorandum for 1985 covers three sets of issues ranging from short-tern to long-range concerns: (a) The discussion of recent developments deals with the impact of the serious floods of 1984 which necessitated substantial emgency food imports. While these imports made it possible for the Government of Bangladesh to avert the threat of famine, they have placed a serious strain on the balance of payments which will continue during FY86 as foodgrain security stocks need to be rcplenished. (b) A preliminary set of projections for the period of the proposed Third Five Year Plan period (FY86-FY9O) is presented, showing the expected tight constraints on the balance of payments and the capacity for ilports as well as on resources to support public expenditures. In view of the unfavorable prospects for the highly concessional forms of assistance on which Bangladesh is heavily dependent, it will be difficult to sustain the 3-4% p.a. economic growth which has been achieved over the past 4-5 years. Increasing efforts will be needed to mobilize domestic resources for the effective operation and maintenance of past investments as well as for additions to infrastructure. (c) Volume III of the report deals with the important interrelations between economic development and population growth, outlining the problems of poverty, underemployment, rapid urbanization and inadequate standards of education, health and nutrition which will beset Bangladesh over the coming decades. Any progress towards the alleviation of poverty depends crucially on the ability to reduce the rate of growth of population. Even under the most optimistic assumptions regarding the future decline of fertility, the extension of even basic public services to the bulk of the population will require the acceptance of modest standards and a higher degree of cost-sharing by beneficiaries. This document has a resricted distribution and may be used by recipients only in the performance of their offtl duties. Its contents may not otherwise be discblod without World Bank authorization

4 List of Abbreviations and Acronyms Us_ay ADB - Asian Development Bank ADP - Annual Development Program ABC - Adult Education Center AGD - Approved Grain Dealer iman - Rice planted before or during the monsoon and harvested in November-J nmary Aus - Rice planted during harch-april and harvested during July-August MADC - Bangladesh Agricultural Development Corporation BBS - Bangladesh Bureau of Statistics BFS - Bangladesh Fertility Survey BJMC - Bangladesh Jute Mills Corporation 3KB - Bangladesh Krishi Bank BK!F - Bangladesh MachLne Tools Factory Boro - Rice planted in winter and harvested during April-June -BPDB - Bangladesh Power Developsent Board BRhC - Bangladesh Rural Advancement Comittee BRDB - Bangladesh Rural Development Board B3SYB - Bangladesh Retr'ospective Survey of Fertility and Mortality 38 - Bangladesh Shilpa Bank BSCIC - Bangladesh Small and Cottage Industries Corporation BSRS - Bangladesh Shilpa Rin Sangatha 31DB - Bangladesh Water Development Board CDST - Customs Duties and Sales Taxes CK - Country BEconomic Memorandu CI! - Cost, Insurance and Freight CIS - Census of Cottage Industries cmi - Census of Manufacturing Industries CPR - Contraceptive Prevalence Rate CRPSC - Committee for Reorganization of Public Statutory Corporations DFI - Development Finance Institutions DBI - Director General of Industries DSL - Debt Service Liabilities DTR - Deep Tubevell ECGS - Export Credit Guarantee Scheme EPZ - Export Processing Zone ERC - Employment Resource Center FERI - Foreign Exchange Risk Insurance FFW - Food-for-Work FN - Fabrique National FOB - Free on Board FY - Fiscal Year

5 GDP - Gross Domestic Product GOB - Government of Bangladesh GR - Gratuitous and Test Relief NSC - Nigher School Certificate Eyv - High Yielding Variety IDDS - Import Duty Drawback Scheme inc - Import Bntitlement Certificate IIS - Industrial Investment Schedule 11fF - International Monetary Fund - Irrigation Management Pilot Program IER - Infant Mortality Rate LUP - Low Lift Pump TLRC - Long-ternm arginal Cost LSD - Local Distribution Center BeC - Maternal and Child Health mic - Mother and Child Welfare Center MIS - Management Information 10 - Medical Officer System MPO - Master Planning Organization MR - Modified Rationing NW - Megawatts NCB - Nationalized Commercial Bank NIP - New Industrial Policy NGO - Non-Government Organizations Operation and Maintenanc_ OKS - Open Market Sales ORT - Oral Rehydration Therapy PPDS - Public Food Distribution System PG - Priority Groups PTI - Primary Teachers Institutes RSS - Rural Social Services R1P - Rural Works Program SACP - Special Agricultural Credit Programme SIS - Census of Small Industries SR - Statutory Rationing SSC - Secondary School Certificate STV - Shallow Tubewell

6 TCF - Trillion Cubic Feet TEB - Total Fertility Rate 3F1! - Third Five Year Plan TmP - Trade and Industrial!l'oicy TOE - Ton of Oil Equivalent TT - Tetanus Tozoid TTC - Technical Training Center ICCA - Upazila Central Cooperative Association leo - Upazila Education Officer UF&PO - Upazila Finance & Planning Officer UDrC - Union Level Health and Family Welfare Center ULC - Upazila Literacy Committee UZDP - United Hatious Development Programme UNO - Upazila Nirbahi Officer UPC - Upazila Parisbad Chairmen UZP - Upazila Parishads VGF - Vulnerable Group Feeding VTI - Vocational Training Institute VDR - World Development Report WES - Wage Earners' Scheme WV - Works Program Wing XPL - Export Performance License

7 BANGLADESH ECONOMIC AID SOCIAL DEVELOPMENT PROSPECTS TABLE OF CONTENTS Pare No. VOLUME I: EXECUTIVE SUNKARY Chapter 1: COUWAY OVERVIEW. SUMNARY AU RECOMMENDATIONS 1 A. Country Overview B. Recent Economic Developments.* C. Medium-term Pros-ects and Issues for the Third Five Year Plan * 25 D. Recommended Aid Commitments for FY86 33 E. Population and Long-term Development Prospects F. Policy Recommendations VOLME II: RECENT DEVELOPMENTS AID MEDIUM-TERM PROSPECTS Chaater 2: RECENT ECONOMIC DEVELOPMENTS AND MANAGEMENT ISSUES 1 Ao Economic Growth o...o o I B. Monetary Policy... 4 C. Balance of Payments Management D. Public Finance: Recent Performance E. Public Finance: Policy Issues Chapter 3: RECENT DEVELOPMKENTS IN AGRICULTURE AND TBE FOODGRAIN SITUATION 31 A. Foodgrain Production B. Availability of Foodgrains C. Agricultural Inputs D. The Jute Sector E. Medium-term Agricultural Development Issues... o Chapter 4: THE PUBLIC FOODGRAIN DISTRIBUTION SYSTEM 60 A. Procurement Policies B. Public Foodgrain Distribution C. Policy Issues

8 Page No. Chapter 5: INDUSTRY 71 A. The Structure of Bangladesh Industry B. Public Sector Reforms o C. Policy Changes Affecting the Private Sector D. Outstanding Issues... * ChaRter 6: DEVELOPMENT ADMINISTRATION 99 Chanter 7: MEDIUM-TERM PROSPECTS AID ISSUES FOR THE THIRD FIVE YEAR PLAN 110 A. Preparing for the Third Five Year Plan B. Prospects for External Assistance C. The Availability and Distribution of Foodgrains D. Balance of Payments Prospects B. Domestic Resource Mobilization F. The Scope for Public Expenditure o G. Recomended Aid Comitments for FY VOLUME III: POPULATION GROWTH AND LONG-TERM DEVELOPMENT ISSUES Chater 8: POPULATION AND DEVELOPMENT: INTRODUCTION 1 Chanter 9: DEWOGRAPHIC BACKGROUND 4 A. Population Structure B. Population Projections Chapter 10: POVERTY AMD EMPLOYMEDT GENERATION 17 A. The Incidence of Poverty... *... *..* B. Population Pressure and the Agrarian Structure C. Non-Agricultural Employment D. Rural Self-Employment - A New Approach Cbanter 11: URBAN DEVELOPMENT ISSUES 36 A. The Pattern of Urbanization B. Constraints and Issues for the Development of Urban Areas Chanter 12: HUMAN RESOURCE DEVELOPMENT 43 A. The Education System: Status and Issues B. Strategies for the Future

9 Pate No. Chapter 13: NUTRITION ARD IKAITH 60 A. Nutrition B. Health Conditions and Services C. Policy Issues in the Health Sector Map (to be included in Statistical Appendix) Acknowledyements This economic report is based on information gathered by an economic mission to Bangladesh in September/October 1984 and a review mission in February/March The report also draws heavily on past World Bank staff research on Bangladesh. Staff who contributed to this report include Andrew Elek (team leader), Zafar Ahmed, Atamn Aksoy, Joseph Bredie, James Greene, Dipak Das Gupta, Alberto Earth, Althea Bill, David Bughart, John Kaveny, Surinder Malik, Om Nijhavan, Syed Nizamuddin, Frances Plunkett, Guenter Reif, Inderjit Singh and James Wright. The production of the report was made possible by the efforts of the support staff of the Bangladesh Division of the World Bank, of our Resident Mission in Bangladesh as vell as the excellent cooperation of the Government of Bangladesh.

10 -iv- LIST OF TEXT TABLES P*ue No. VOLUME I: EXECUTIVE SUMMARY Chapter 1: COUNTRY OVERVIEW. SUMMARY AND RECOMMENDATIONS 1.1 Balance of Payments, FY84-FY Foodgrain Availability and Distribution, FY84-FY I 1.3 External Assistance, Commitments, Disbursements and Pipeline, FY84-FY VOLUME II: RECENT DEVELOPMENTS AND MEDIUM-TERM PROSPBCTS Chapter 2: RECENT ECONOMIC DEVELOPMENTS AND MANAGEMENT ISSUES 2.1 GDP Growth by Sectors, FY73-FY Money Supply and Domestic Liquidity Outstanding Advances of the Scheduled Banks to the Private Sector Price Developments, FY81-FY Balance of Payments, nt8o-7y Merchandise Exports, F78O-7Y Merchandise Imports, FY8O-FY Governxent Current Budget, FY83-FY Financing of the Annual Development Program, FY84 and FY Consolidated Budget Overview, FY Chapter 3: RECENT DEVELOPMENS IN AGRICULTURE AND THE FOODGRAIN SITUATION 3.1 Trends in Agricultural Production and Value Added, FY79-FY Foodgrain Prices and Procurement, 1Y80-FY Monthly Cereal Stock Flow (July 1984-June 1985). 3.4 Actual and Projected Arrival of Foodgrain 39 Shipments (July 1, 1984-June 30, 1985) Index of Minimum Market Price for Coarse Rice, ny80-fy Sumary of the Foodgrain Situation, PY79-FY Provision and Utilization of Agricultural Inputs, FY79-FY85...o...o......* Indices of Rice, Wheat, and Fertilizer Prices, FY79-FY85... so Agricultural Credit Recovery Performance by Institution, FY81-FY

11 Page No Share of Refinance in Total Agricultural Lending by Institution, FY81-FY Agricultural Credit Disbursements and Financing, FY81-PY Rav Jute Supply and Disposition, FY79-FY Chauter 4: THE PUBLIC toodgrain DISTRIBUTION SYSTEM 4.1 Economic Subsidy on Public Foodgrains Distribution, FY79-FY C'haRter 5: INDLSTE 5.1 Structure of Bangladesh Manufacturing, Sectoral Distribution of Manufacturing Establishments, Workers and Value Added ( )... *...*.**..***** anufacturing Output and Investment Ratios of Value Added to Gross Output by Sector Factor Shares in Gross Output Government Annual Development Expenditures Performance Ind5;cators of Public Industrial Corporations hbapter 7: MEDIUM-TERM PROSPECTS AND ISSUES FOR THE TRIRD FIVE YEAR PLAN 7.1 Couitments of External Assistance, FY74-FY Commitments and Disbursements of External Assistance, FY83-FY90 lie Foodgrain Requirements and Supplies, FY84-FY9O Public Foodgrain Distribution System Operations, FY84-FY Public Foodgrain Distribution System, Sources and Uses of Funds, FYB4-FY Balance of Payments, FY84-FY Sensitivity Analysis of the Capacity for Imports Government of Bangladesh Budget..... O (A) Budget Overview (Sources of Funds)... e (B) Budget Overview (Uses of Funds) Foreign Exchange Requirements and Sources, FY85-FY External Assistance, Commitments, Disbursements and Pipeline, FY84-FY

12 -vi- Page No. VOLME III: POPULATION GROWTH AND LONG-TERN DEVWLOPIENT ISSUES Chapter 9: DEMOGRAPHIC BACKGROUND 9.1 Population Size and Growth Differentials in Reported Fertility Mortality and Fertility Assumptions for Pcpulation Projections Projected Population Size and Growth Projected Dependency Ratios Projected School Age Population of Bangladesh, a so as a an.*es. so** Projected Working Age Population Urbanization in Bangladesh, Chapter 10: POVERTY AND MPLOYMET GENERATION 10.1 Average Daily Wage Rates of Workers in Rural Areas, / Average Daily Wage Rate of Unskilled Industrial and Construction Workers, 1969/ / Chagter 12: HUMAU RESOURCE DEVELOPMENT 12.1 Primary Education *...* Projections of Primary School Requirements Secondary and Tertiary Education Institution by Type, Number and Enrollment in Chapter 13: NUTRITION AND HEALTH 13.1 Tentative Allocations for Health Sector,

13 COUNT!! DATA - 3ANCLADE ARM POWUI^lI0 (1985) DENSITE (1985) 143,998 kx million 699 per kb2 of total ares Rate of Growth: 2.6S 1,062 per kb2 of cultivable land PWUEATIOW CUICTERISTICS UEALYt (1981) Crude Birth Rate (per -000) (1982): 41.7 Population per physicima: 7,812 Crode Death Rate (per O000) (1982): 16.1 PopulLtion per hospital bed: 4,088 Iofant Mortality (per -000 live births) (1984) 125 DCWMu DISUIRUTITO (1974) DISTRIBUTION OF LAND OUNERSEIP (1978) 2 of national income. highest quiztile: 42 Z owned by top 10Z of owners: 49 Z of national income, lowest quintile: 7 Z owned by smllest 10 of owners: 2 ACCESS TO PID WATER (1980) ACCESS TO IECTRICITY (1973) Z of population - urban: 26 Z of population - urban: 3.5 Z of population - rural: 40 Z of population - rural: NUTRITIOU (1983) EDIUCATION Calorie intake as of requiremets: 84 Adult literacy rate (1) (1980) 26Z Per capita protein intake (gr8m): 42 Primary sheool enrollment (Ci (1981) 541 C PER CAPITA IN FY83:Ia US$130 GaO NATIONAL?RGUCT (1983/84) ANNUAL RATE OF COlIWr (1. constant yric es) will. USS S YI70-75 FY75-80 FTSO-84 GI at Narket Prices 12, Gross Domestic Invest met Gros National Saying Current Account Balance -1, Reports of Coods, fob Imports of Goods. cif OUTPUTl 1.R30 F0RCE, AID PCTITT IN 1983/84 Value dded fb Labor Force La V. A. Per Worker uill DS$ m ill. S US$ S Agriculture Ildustry 5,794 1, Services TotalfAverage 12, CENTRL GOVIM NT FINANC Jd (Bill. Tk' - S of CDP _1983fS4 1974/ Current Revenues Current Expendittres Current Surplus 5, Capital Ezpenditures 30, Exterual Assistance (net) 28, Q13 fa World alak Atlas, lb At market prices. le Civilian labor force; unemployed are allocated to sector of their norml occupation. /d Preliminary actual. - Less than one half of the smallest unit sbovn.. Not available. - Not applicable.

14 CO DAN - AWJM NM=. crrr AMR,3 J Je Jamx 1981 June 1983 Jan 1983 J (billim Taka outstading, ta of period) Mosey nd Q i Msey look Credit to Public Sector RN& Credit to Pr-to Sector (Percentages or Index Numbers) Nmoey ad Quasi Mose as t of CDI ? CGazral Price Index ( W0) L An1al pez ctne chagl in: General Price Ind f 8.3 1S M2S lank edit to Public Sector Sak eredit to Private Sector ; ""Ie ow PAThNrS UCIDISI ZPORTS (1983/84) (mi. USS) 1976/ /2L mill. IIS$ S Exports of Goo, fob 411 8Z2 RAN jute Imports of Goods, cf Jute goods 356 U 3 Trade Cep (deficit - -) ,531 Tea 69 8 emm-factor service., et 2 30 Leather W=oMs' Remittances I 552 Fish & shrimp Other Factor Paymat. (net) All other coodities Current Accout Balance ,01 Total 8Z2 100 Direct Foreia luveatrsnt set ul Borrowing 247 S63 ELXTERL VEFT. June Misbursemeuts) (277) (634) ImortivatiaOe (-30) (-71) will. l33$ Capital Crants T -- facilities, t Other Capital, net 18-8Z Public Debt, incl. Cuaxanteed Private Debt 4,469.9 Uou-Curanteed Private Debt.. Chane in Reserv -- increase) Total Outstading & Disbursed 4,469.9 Gross Reserves fend of year) NM OF ECCRARM OWcb RAT OW UCAN (Mach 1985) ) ~~~~~~DIST SERVICE RATIO FOR 1954/IS 1i Taka 26.5 Public Debt. incl. Guaranteed Private Debt 18.1 Nor-Quaranteed Private Debt Total Outstanding 6 Disbursed 18.1 IBZD/TDA LNDI:NG. June 1983 (million MSS) IlB D IDA Outstanding & Disbursed ,365.8 Undisbursed - 1W05.0 Outstandin_. incl. Undisbured , not available. - not applicable. La Conumr Price Indez for niddle-income families in Dbaks; anual averages. Mare 1985

15 Chapter 1: COUNTRY OVERVIEW, SUMKARY, AND RECOMHENDATIONS A. COUNTRY OVERVIEW 1.01 Essential ingredients for sustained economic growth include a labor force with adequate training and skills, arable land for agriculture, capital and infrastructure to permit additional output to be produced and marketed; access to appropriate technology for raising the productivity of labor as well as access to raw materials from either domestic or external sources. If adequate supplies of all of these ingredients are present, then combined with effective institutions for development administration, sound macro-economic management and a consistent set of policies to promote their rational allocation, these resources would provide good prospects for rapid economic growth In Bangladesh, sustained and rapid economic growth would be essential to permit a gradual improvement in the present extremely low standard of living of the vast majority of its population. At the same time, it has to be recognized that very few, if any, of the vital ingredients for growth are available in adequate quantities. In these circumstances, sound short term economic management alone will not be sufficient to guarantee a satisfactory pace of development unless combined with effective long-term strategies to augment the supply of all of the key factors of production. This does not mean that short-term policy making is not vitally important. Tackling the fundamental longer-term issues of development, some of which are discussed in this report, will only be possible if there is an effective system of administration for dealing with important short-term issues and fluctuations, including a well-managed food distribution system for coping with the natural disasters to which Bangladesh is inherently vulnerable. Similarly, in order to develop and implement sound longer-term economic development strategies it will be essential to avoid continual disruptions due to periods of high inflation or recurrent depletion of foreign exchange reserves needed for the purchase of essential imports. Both short-term and long-term policies need to be of a very bigh standard to provide hope for sustained improvement in the lives of the people of Bangladesh For these reasons, this report deals with both short and long-term issues. Volume II discusses short-term developments, dealing at some length with the effects of the 1984 floods and the Government's efforts to deal with the situation, drawing some lessons from this experience for the future of the Public Food Distribution System. Volume II also discusses a number of macro-economic management topics, with particular emphasis on the problems stemning from the excessive monetary expansion of Chapter 7 is designed to provide a link between short and long-term issues by analyzing medium-term prospects and issues for the Third Five Year Plan period (FY86-90), stressing the need for a serious and realistic assessment of the limited resource prospects for the next five years. Volume III then deals with the important interrelations between economic development and population growth, discussing the problems of poverty, underemployment, rapid urbaniza-

16 -2- tion and inadequate standards of education, health and nutrition which will beset Bangladesh over the coming generation or more Prospects for long-term development in Bangladesh are dominated by and limited by the high and rising density of population. No matter how vigorously and successfully programs for fertility reduction can be implemented, the density of population will rise from around 1,800 per square mile in 1985 towards 3,000 by 2015, a mere 30 years froli now. This inexorable rise in the pressure of population will make economic development extremely difficult, but not impossible. There are countries which have managed to boost incomes per head substantially in recent decades despite a similar density of population in relation to available arable land. One of the important keys to their success has been a structural transformation of their economies, involving a rapid increase in the relative importance of sectors of production other than agriculture. This process has enabled those economies to absorb labor which is no longer needed in agriculture into growing industrial and service sectors at increasing levels of productivity. Given the limits on absorbing additional labor in agriculture, a similar process of transformation will need to be promoted in Bangladesh over the next 10 to 20 years. At the same time, it will be vital to ensure that policies to promote other sectors are not at the expense of maintaining an adequate momentum of agricultural growth Agriculture remains the backbone of the Bangladesh economy, accounting for close to 50Z of GDP and employing over 75% of the labor force. A continuing growth of agricultural production in excess of the rate of population growth will be essential to reduce the burden of foodgrain import requirements and to provide additional employment opportunities. For some years to come, agriculture will remain the most important source of incremental employment for a growing labor force. The growth of demand for ancillary activities, ranging from the supply of modern agricultural inputs to the processing of agricultural products, together with the gradual growth of consumer demand derived from the marginal growth of agricultural incomes will also be crucial for generating the bulk of employment opportunities outside agriculture. The experience since independence has shown that, despite the availability of improved agricultural systems based on high-yielding varieties oi foodgrains, it is difficult to maintain a sustained growth of agricultural output which is in excess of minimal requirements. With the continuous growth of population, every year has to be a year of record foodgrain production in order to avoid a resurgence of foodgrain imports. At the same time, the vulnerability of Bangladesh agriculture to drought and flood makes it extremely difficult to maintain a high and even pace of improvements in productivity from limited land. The modest 3.3% annual average rate of growth in foodgrain production over the past five years bears witness to these problems. If this performance cannot be improved upon over the coming years and the average rate of growth of agriculture maintained at, or above, 4Z p.a. through more intensive irrigation combined with other inputs and improved farming techniques, then the foundations for economic growth will be gradually undermined.

17 Over the past decade it has also become increasingly evident that an overall growth in agricultural output will not, in itself, be adequate to assure adequate nutrition to all sections of a growing population, more and more of whom will not have access to farming land. Productive employment opportunities will need to be generated in other sectors in order to provide the incomes which can transform the need for improved nutrition into growing effective demand for the output of the agricultural sector. Accordingly, industry must be promoted vigorously along with agriculture and concerted efforts must be made to reduce demand and supply constraints to industrial development In the coming years, a sustained expansion of industrial output will depend to a gradually greater extent on increased access to export markets. The limits on future prospects for foreign aid together with the limits on prospects for major short-term increases in domestic resource mobilization imply that the real growth of government expenditure cannot be expected to be fast enough to be the major contributor to increased industrial demand. Similarly, a sustained 4% growth of agricultural output would only represent a very modest growth of incomes per head which could serve to widen the market for industry. Moreover, only part of the growing domestic market for industrial products can be supplied efficiently by domestic industry. Even those industries which can produce efficiently for a constrained domestic market will need to rely heavily on imported raw materials or intermediate products due to the absence of almost all physical raw materials for industry in Bangladesh. Increased access to export markets will be needed not only because of the limitation of effective domestic dpmand, but also to help generate the foreign exchange required for the substantial imported inputs needed for all industrial production The necessity of expanding industrial exports will not, unfortunately, assure their feasibility. Some difficult obstacles will be posed by the protective barriers erected by developed countries against Third World exports. However, the experience of East Asia indicates that a substantial increase in export quantity and value can be sustained over several decades, provided that such an export drive is backed up by effective market research and the assurance of high product quality, combined with the willingness to shift between products in response to changing market opportunities. In view of the much smaller base from which non-traditional exports from Bangladesh have recently begun to expand, there is reason to believe that an overlapping set of supply constraints, rather than market constraints, will limit industrial exports from Bangladesh at least during the next decade; these supply constraints, some of which are listed below, will be equally relevant for industrial production aimed at the domestic market In spite of its large population, human capital is an important constraint to the economic development and modernization of Bangladesh. The overwhe'lming majority of the labor force lacks the degree of literacy and

18 -4- numeracy which have proved to be important factors in the modernization of other nations. The base of skilled craftsmen and professionals is small. Even the excess pool of unskilled labor should not be simply regarded as an attribute which leads to a "comparative advantage" for labor-intensive industrialization. The poor health and nutritional status of the members of the industrial labor force, together with the lack of even basic education, can lower their productivity per dollar earned to below that of employees earning substantially higher real wages in other potentially competing countries. Poor working conditions militate against the maintenance of the consistently high quality of production which is absolutely essential for the growth of industrial exports. Perhaps most importantly, the "advantage" of inexpensive unskilled labor, can only be realized if sufficient complementary inputs of equipment and management are available, combined with adequate infrastructure to facilitate industrial expansion The physical infrastructure of Bangladesh is in urgent need of improvement. While gas reserves are abundant in relation to present use, substantial investm'-nts will be required to make gas available to fuel economic expansion. Despite a sustained 13Z p.a. expansion in electric power generation capacity over the past ten years, the shortage and poor reliability of power poses an important bottleneck for industrial expansion. The transport network is weak and even the facilities which exist are in need of extensive repair and upgrading. A balance needs to be struck in this sector, as well as in many others, between increasing the coverage of services with the need to avoid deterioration in the efficiency of the limited available facilities. Within the affordable limits on investment in new infrastructure, great care must be taken in a poor country to look for least cost solutions for improving and extending the network of gas, power and transport facilities Industrial development will also require high quality management. The need for improved management of public industrial enterprises has been clearly recognized; the divestment of a substantial number of units and the setting up of an effective monitoring system for the remainder can be expected to promote substantial improvements. At the sane time, the efficient management of private enterprise in economic terms (as against narrowly defined financial profitability) cannot be taken for granted except in the context of an economically rational policy framework. If the existence of a complex system of protection leads to a distorted set of relative prices, while the effective cost of capital is greatly reduced by the non-enforcement of financial obligations, then private entrepreneurs cannot be readily expected to allocate resources in line with Bangladesh's potential comparative advantage in labor intensive industrial production. The combination of industrial policies which have tended to favor production for domestic rather than export markets in the past, together with the protection and/or subsidization which has frequently been available to sustain modern industrial units once set up, will need to be reassessed in order to remove the existing bias against an "outward-looking" and inherently more risky export-oriented

19 -5- strategy for industrial development which will be increasingly needed for the future In addition to these constraints, Bangladesh faces a binding constraint of limited savings. The present rate of investment at around 16-17% of GDP can be regarded as no more than barely adequate for economic growth of around 3-4Z per annum, let alone the 6-7% p.a. which would be more in line with the nation's needs and aspirations. Nevertheless, it will be increasingly difficult to finance even the present rate of investment. With a very low gross domestic savings rate, the rate of investment in recent years has been financed largely by remittances amounting to 4-5% of GDP and foreign aid inflows amounting to 10-12% of GDP each year. Neither of these external sources can be expected to grow in real terms over the next few years, while the scope for increasing domestic savings in a very poor economy or for attracting substantial private capital flows to Bangladesh will be quite limited for the foreseeable future Facing up to and gradually easing the above combination of constraints will require sustained attention to these longer-term issues together with the willingness to make difficult decisions, often involving short-term sacrifices for longer term gains. Such decision making is less likely to take place in the absence of short-term stability. It is in this context that the short-term developments of 1984 need to be evaluated. A recognition of the enormous long-term problems facing Bangladesh will serve to underline the need to correct the deterioration in the macro-economic situation which has taken place, so as to prepare a reasonable basis for launching the Third Five Year Plan. The Plan itself will need to address the full range of serious longer-term development issues, dealing pragmatically with the inevitable trade-offs involved in the process of development, recognizing the narrow limits of available resources.

20 -6- B. RECENT ECONOMIC DEVELOPMENTS 1/ was a diffi^ult year for Bangladesh, dominated by a sequence of damaging floods. The floods, came in three waves, adversely affecting the Boro, the Aus and then the Anan crops. In terms of crop losses, estimated at up to 1.5 million tons, the severity of the flood damage was comparable to that of Fortunately, due to investments in more dispersed food storage, the improved efficiency of the Public Food Distribution System (PFDS) and the timely decisions by GOB to assure an adequate flow of imports during the critical August to November period, a tragic famine was successfully averted. By late September, the 1984 flood-waters were receding and, helped by light rainfall during October, the Aman crop for 1984 is estimated to be close to 8.0 million tons, comparable to the production recorded in 1983 under more normal weather conditions. There are increasing indications that the immediate food crisis has passed, but the impact of the floods will continue to be registered in other aspects of economic management for some time to come Turning to other sectors of the economy, FY84 witnessed a rdvival of the industrial sector due to a combination of factors including an improved policy environment following the 1982 promulgation of GOB's New Industrial Policy; improved access to imports during a period of relatively comfortable foreign exchange reserves; the welcome increase in non-traditional industrial exports, especially ready-made garments; the increased domestic demand generated by the satisfactory crops harvested during 1983 and the substantial injection of demand by a sharp increase in private sector credit. Therefore, although agricultural output for the latter part of FY84 was adversely affected by the floods, the improvement in industry led to an increase in CDP of around 3% for FY84, compared to 1.4% in FY82 and around 2.7% in FY83.2/ Macro-economic management 1.16 Monetary policy: Over the two years ending in June 1984, total liquidity increased by just over 80%, which is more than 35Z faster than the growth of nominal GDP over the same period.3/ Part of this increase was due to the rebuilding of foreign exchange reserves from the low point of June lt Unless otherwise specified, references to years, e.g., 1984, are to calendar years. Fiscal years (July 1 to June 30) are referred to as FY84, etc. 2/ These are staff estimates of GDP. Estimates by the BangLadesh Bureau of Statistics are presented for comparison in Table 2.1 of Volume II. 3/ As measured by the increase in currency, demand and time deposits, based on Bangladesh Bank, Research Department data. This measure of the money supply (M2) increased by 28% in FY83, then by a further 41.5% in FY84.

21 , but over 70Z of the increase in liquidity was due to an increase in domestic credit. Budgetary deficits and public sector borrowing were quite modest; almost all of the expansion was accounted for by outstanding private sector credit which more than doubled during those two fiscal years (rising from Tk 23 billion to Tk 49 billion), with the bulk of the increase concentrated in last part of the period. The undue relaxation in monetary policy represented by these figures may have helped to fuel a recovery in the non-agricultural sectors of the economy, but it has also set up pressures which will dominate macro-economic management throughout 1985 and may undercut some of the other positive influences which have led to the recent upturn in industrial performance The FY84 increase in domestic credit of Tk 20 billion represents considerably more than all of Bangladesh's foreign exchange reserves, even at their peak of $558 million in early Therefore, only a small part of the recent increase in domestic credit can be offset by drawing down foreign exchange reserves. There will be an inevitably severe upward pressure on domestic prices due to the excessive growth in the money supply in FY83 and FY84, compounded by the 20Z increase in rice prices due to the flood-related crop losses of 1984 and exacerbated by an even more rapid expansion of domestic credit during the first half of FY85: between June and December 1984, domestic credit expanded by a further Tk 10 billion. Monetary sector management has been strengthened since January 1985, but it will require an extended period of restraint to ease the pressures which have been created For the next 12 months, economic management in Bangladesh will be hard pressed to strike a balance between the need to ease the pressure on the balance of payments due to high levels of demand in the private sector and the risk of recession due to the credit restraint which will be required to avoid an unduly sharp resurgence of inflation. Any acceleration of the rate of domestic inflation at a time of quite low international rates of inflation would require a large number of consequential policy decisions, inter alia, to avoid an erosion of the competitiveness of exports from Bangladesh. Moreover, if inflation were to rise, correspondingly larger increases would be needed in a number of important administratively determined prices (for commodities such as foodgrain ration prices, fertilizer, wholesale prices, natural gas tariffs) in order to make any progress towards the reduction of subsidies and price distortions Balance of payments management: The value of exports rose from $627 million in FY82 to $822 million by FY84, due to a recovery in the prices of raw jute, jute products and tea, together with the emerging relative importance of non-traditional exports. Even though these newer exports still account for a minority of total exports by value, their rapid growth represents an encouraging step towards the urgently needed diversification of exports and the establishment of a sizable and variable labor-intensive export industry. Merchandise imports remained low in FY83 and FY84 as economic recovery from the recession of the early 1980's was slow to emerge and aid-financed capital goods imports were depressed by delays in project

22 -8- implementation. Remittances reached a peak of $628 million in FY83 before declining to just over $550 million in FY84. Therefore, even though aid disbursements remained at around $1,300 million in each year, the balance of payments situation was relatively comfortable during FY83 and FY84. Foreign exchange reserves recovered from a low point of $115 at the end of FY82 to $516 million at the end of FY84 (representing a little over 2.5 months of imports) Since the last quarter of FY84, there has been a deterioration in the balance of payments position, with a drawdown of reserves of over $100 million during the first half of FY85. Part of the pressure on the balance of payments has been due to the high level of food imports necessitated by the flood emergency. Additional food aid in response to the crisis has been quite limited so that, of an expected 2.8 to 2.9 million tons of foodgrain imports for FY85, over 1.2 million tons, valued at about $250 million, will need to be purchased from GOB's own resources. Other imports have been stimulated by the recovery of the non-agricultural sectors and the injection of additional demand through the domestic credit system. Workers' remittances have also declined further and are now projected to be no higher than $450 million (or close to their FY82 level) for FY85. Therefore, although exports are expected to increase to $900 million and aid disbursements between $1,350 million and $1,400 million, a substantial drawdown of gross reserves of over $150 million is projected for FY85. The decline in reserves would have been even more marked if a substantial portion (around $190 million) of foodgrain imports had not been purchased on credit (deferred payment basis). This short-term borrowing will, however, add to the difficulty of managing the balance of payments over the next three years when there will also be substantial obligations for repurchases from the IMF. As shown in Table 1.1, FY86 is expected to be a particularly difficult year for balance of payments management; the capacity for imports is likely to be lower than in FY85, due to a serious constraint on the availability of foreign exchange.l/ 1/ Prospects for FY86 are discussed further in Sections C and D of this chapter.

23 ~~~~-9- Table I.1: Ealsuce of Pruners. r Cut$ nillios,m current priceso) Average increases Actual atite eed rut ei a ns5 ns6 ns7 rnsa nss ngo nsa-go nas9f ( La Remorts ma im in in I' I.-i LAU1 Li A Ra jute A jute goods S la, leatbhr, fish a-recrditioeal expets, *.e.i O lemrta tc.i.f.) 353 M 2.eo U = 911 t 0. teodgrsie petrelwna Fertilizers Capital soodc Ocw imports & , ,428 1, CaIl imagrts other tbhe focdgrains) (1.955) (2.209) (2.284) (2.439) (2.741) (3.065) (3.456) (3.3) (1.6) Tra le -1i-5 -AdS -i a260 I Services (not) (of whicb remittances) (552) (450) (478) (5161 (557) (601) (650) (-3.5) (0.0) Current Accot Balance -i-012 -Li -LI -i-1a -L5 -L Aid diaber enmte L2U L75 IlS 2, Li Food Aid 277 3e Project Aid S , Ceadity id l KUT Aortisation Deferred gaynte food mportse Food lea mortization tort-tam ad otber borrwing Change in otber net liabilitie j Chen$* in reserwe meets (- is irease) Keswrendn Item Bnd-year gross S (as onoths of pmorts) (2.6) (1.5) (1.6) (1.4) (1.5) (1.7) (1.6) Debt-service ratio Li Curent account balace as I of CD L39 Jenorts_in conta 1T84 prices LI Il kll II im Liii ILi LAW loodgrain 398 5S Other ,187 2,127 2, , La Deflated in acb cee by the iadex of increases in average prices of _nfactured esprte fra all delowd to developing contries OM). Lk Otebr impqrt incle all interndb la ad final goods not elseubere indicated. ncludee special bslace of paysets assistance of $1013 for flu and $5#O for n187. Debt-service ratio is calculaced as (interest sod risatioa on on KILT loans food loan ad 1W oblisacions) divided by (narchandias sports plus non-factor services receipts).

24 In these circumstances, it will be important to maintain a flexible exchange rate policy and considerable care will need to be exercised in managing the secondary foreign exchange market. The relative importance of the Workers' Exchange Scheme (WES) secondary market has grown significantly over the past few years and access to foreign exchange through this market for imports of capital goods and raw materials has been a crucial factor in the recent recovery of the industrial sector Over the past 6 months, as remittances have declined while import demand surged, it has proved difficult to manage this WES market, due to a persistent upward pressure on the exchange rate in this market. For a period of five months from July 1984, the exchange rate premium in the WES market was fixed at 7-10% above the official exchange rate. Substantial sales of foreign exchange by Bangladesh Bank through the WES market were required to maintain this rate and the fixed ceiling was lifted at the end of November / The premium is now reset from time to time by a committee. By February 1985, the margin had been allowed to widen to 13-14%, while the official exchange rate was depreciated from Tk 25.2 per US$ by February In the future, it will be necessary to devise an appropriately flexible system of management of the WES system in order to allow it to fulfill its important objectives of providing access to imports without the need for a cumbersome licensing process as well as providing a signal of the underlying pressures on Lhe balance of payments while avoiding undue fluctuations in the WES exchange rate. In the Bangladesh economy, characterized by a limited resource base and extensive dependence on trade, no exchange rate regime can maintain a manageable balance of payments unless it is backed by sound management of overall demand Public finance: In recent years, GOB has pursued relatively cautious fiscal policies and significant efforts have been made to consolidate the investment program and to strengthen the system of budget management and accounting. The FY83 Budget contained significant revenue raising measures and provided for a careful matching of expenditure targets with realistic estimates of a' 3ble resources. The FY84 Budget sought to consolidate the gains of the preceding year, wnile helping to set the stage for a broadened domestic resource mobilization effort in the future. However, total resources fell well short of the budget target as dutiable imports and aid disbursements lagged below expectations. Total resources for ADP financing from sources other than the domestic banking system were around Tk 28.2 billion compared to the original estimate of Tk 34.8 billion. A substantial deficit which would have added further to the already rapid growth of liquidity was 1/ Net sales of foreign exchange by Bangladesh Bank to support the WES market between July 1984 and January 1985 amounted to over $200. To some extent, this figure represented a diversion of imports from the official to the WES market, but some of the demand for imports could have been reduced by allowing a higher premium on the WES market.

25 -11- avoided by a significant shortfall in development expenditures which reached just over Tk 30 billion, nearly 15% below the originally set as well as the revised budget targets. The expenditure shortfall was attributable, in most part, to physical and administrative constraints on project preparation and implementation; a shortage of Taka resources was avoided by net sales of special high-yielding Treasury Bonds to domestic banks in the amount of over Tk 1.9 billion In the FY85 Budget, the target for ADP expenditure was set at almost Tk 39 billion, which is about 30% higher than the preliminary actuals for FY84. The increase in current expenditures has been limited to 16%, which may not prove adequate after accounting for the substantial increases in public service salaries during On the revenue side, the FY85 Budget provided for only minor new revenue measures expected to yield about Tk 1 billion. Tax revenue will be boosted by the resurgence of dutiable imports associated with the recovery of the non-agricultural sectors. However, assuming that there will be no further borrowing from domestic banks, the total resources available for financing the ADP are likely to be in the order of Tk 34 billion, compared to the budget estimate of Tk 39 billion. A large part of this shortfall is due to a lower than expected disbursement of project aid and will thus be matched by lower than expected ADP expenditures The over-estimation of the capacity for project implementation in the FY84 Budget and a likely similar outcome for FY85 indicates the need for a higher degree of realism in planning the ADP. Over-ambitious targets make the task of monitoring implementation extremely difficult: meeting these targets would exceed available resources, while an acceptance of underimplementation in order to avoid overall budget deficits would tend to undercut the credibility of requests for additional assistance. It would be preferable to set realistic targets which would provide the basis for effective monitoring and management. Above all, ambitious ADP targets should not be set at the expense of persistent underfunding of essential expenditures for operation and maintenance of existing assets The financing of the Public Food Distribution System (PFDS) is an important part of GOB's overall financial operations. During the latter part of FY84 and FY85, the financing requirements of the PFDS were substantially increased because of the need for increased distribution of foodgrains due to the flood-related crop losses which led, in turn, to accelerated purchases to maintain adequate stocks and supplies. Because of the limited response of aid donors to the emergency and the Limited scope for domestic foodgrain procurement during a period of already high market prices, much of the burden of the additional imports required had to be borne by GOB. Some of these imports were financed directly from GOB's cash resources, but a substantial volume was also purchased on a deferred payments basis. The impact of the substantial short-term debt incurred for food purchases will be registered not only in the balance of payments, but also in GOB's overall financial position over the next three years. The importance of the food budget and its financing is sufficient to warrant the adoption of a comprehensive over-

26 -12- view of GOB's total financial operations to supplement the currently available presentations of the Budget. Agriculture 1.27 The foodgrain situation: As already noeed, the impact of the 1984 floods was particularly severe, with the damage to three successive crops resulting in total losses of up to 1.5 million tons of foodgrains. However, with favorable weather from October 1984 and a record use of fertilizers, the total Aman crop for 1984 is still likely to be close to 8 million tons, while the irrigation facilities in place should also allow Boro production of up to 3.8 million tons. Totel foodgrain production for FY85 may, therefore, increase to 15.9 million tons (about 2.4% higher than in FY84). While this may be casse for some sat.isfaction, there are certainly no grounds for relaxation; in Bangladesh, record levels of food production need to be reached every year merely to avoid a growing need for foodgrain imports. Having started FY85 with a low (800,000 tons) stock of foodgrains and following the need to distribute foodgrains in excess of domestic procurement plus imports during the period up to December 1984, there is a pressing need for restocking before the next "lean" period of late 1985: the experience of 1984 has underlined the need for ending each financial year with adequate food reserves of at least 1.25 million tons In spite of the high volume of foodgrain imports (close to 3 million tons) expected in FY85, foodgrain stocks are forecast to remain below 1 million tons at the end of FY85, due to the high offtake from the Public Foodgrain Distribution System caused by the floods. Moreover, Table 1.2 shows that over 2 million tons of imported foodgrains sre likely to be needed during FY86 in order to rebuild foodgrain stocks, even in the absence of any more weather-relate disruptions. These figures indicate that above average volumes of food aid would again be desirable during FY86 to avoid an undue additional strain on the already difficult balance of payments situation forecast for the next two years. COB has clearly demonstrated its ability to act decisively to deal with the flood-induced food crisis and its ability to absorb and distribute effectively a sustained high volume of imports: in these circumstances, a special effort to assist Bangladesh to restock in preparation for the next inevitable spell of adverse weather ccnditions is certainly warranted.

27 -13- Table 1.2: Feodargin AvailAbility wd Distribtlion: Fr84-rT86 (in -000 metric tows) Fr86 ( cntal) Fr85 (estimates) FY86 (rojiections) Rice Wbeat Total lice Wheat Total Rice Wbeat Total Domestic Production, gross ,200 15,482 14, ,452 16,700 Doectic Supply, neet / 12,835 1,058 13,894 12,994 1,166 14,161 13,673 1,283 14,956 Cowermeut Oerat ions Opening Stocks Ji rxoxits , Food aid 164 1,324 1, ,507 1, ,700 GOB resources , Cash (17) (214) (231) (165) (100) (265) (150) (398) (548) Deferred paysments ( -) (338) (338) (351) C619) (970) C -) C -) ( -) Damstic Procurement Tntsl Available , " Total Distribution L latio sales , ,240 Open merket sales Food-for-Wok Elief 6 W AL Losses from stocks ; Closing stocks ,000 1,250 La Adjusted for zme of grain for seed. feed end aste and for crop cycle overlap with fiscal years. lb %T Vulnerable Group Feeding. Source: GM and World Food Program estimates for Fr84 and 1185; staff projections for FY86.

28 The effectiveness of WCOB's foodgrain operations in terms of accelerating imports and food distribution during the crisis period of midto-late 1984 has been reflecled in the absence of the frmine conditions which were evident after the 1974 floods. Increases in rice prices were limited to around 20Z for the year,.ihile wheat prices remained steady throughout the period. Since food relief operations can only reach part of the population, the stabilization of open market prices following crop losses is an important objective in its own right. GOB's ability to achieve an even better degree of price stabilicy was limited by the very modest amounts of grain available for open market sales. Although in-country stocks of foodgrains never dropped below 540,000 tons, close to 400,000 tons were in transit or in storage at local distribution points during the critical months of September and October. Only 150, ,000 tons were available during this period to cope with any potential disruption of the 300,000 tons per month flow or food th-ough Bangladesh's limited port facilities. The foodgrain "pipeline" was thialy stretched and a food crisis was very narrowly averted by the successful operation of the PFDS Agricultural inputs: The distribution and utilization of minor irrigation equipment, fertilizers and agricultural credit increased significantly during FY84 and early FY85. The offtake of fertilizers, enccuraged partly by the widening differential between the official price of fertilizers and the market prices of rice, rose considerably and led to increasingly serious shortages oe fertilizer stocks by late The foodgrain-fertilizer price ratio in Bangladesh continues to be highly favorable compared to many other countries aad the high demand for fertilizers suggests that there remains scope for further substantial price adjustments aimed at the elimination of subsidies on the use of fertilizers in the near future Disbursements of short-term agricultural credit increased by 77% in FY83 and by 66X in FY84. Medium-term credit has increased less rapidly, related to a slower rate of increase in the sale of minor irrigation equipment. Nevertheless, total disbursements of agricultural credit rose from Tk 4.2 billion in FY82 to Tk 10 billion by FY84. This trend has continued during the first part of FY85, with a high share of this growth in agricultural lending made possible by refinancing from Bangladesh Bank. Unfortunately, the rapid growth in disbursem-ents has been accompanied by a deteriorating standard of credit recoveries: by FY84 recoveries amounted to only 42Z of the amounts due. A continuation of these trends cannot be sustained: the financial viability of the agricultural credit institutions is being destroyed, while growing reliance on central bank refinancing would run increasingly into conflict with the central bank's key function of maintaining a manageable and stable growth of the supply of money in line with the overall growth of the economy. Accordingly, it is imperative that the monitoring and recovery of agricultural credit be improved Jute: The loss of raw jute production due to the 1984 floods is estimated to be around 1 raillion bales or 18% of the expected 1984 crop.

29 -15- Since world raw jute stocks in 1984 were already at depleted levels and India's jute crop was also damaged, raw jute prices (which bad already risen from $290/ton to $410/ton during FY84) rose dramatically in early FY85 to over $800/ton. Increases in jute product prices, which compete with synthetic products in world markets, have been much more limited during the past 18 months, causing serious difficulties for the jute mill sector in Bangladesh and elsewhere. The financial losses of the domestic jute mill sector are expected to exceed Tk 2.5 billion during FY85. The high prices for raw jute and jute products will also have some adverse consequences for the competitiveness of Bangladesh's main exports. Wiile high export values will be recorded in FY85 despite production losses, these high short-term jute prices may not only lead to some long-term erosion of markets but also to a large supply response from jute growers which may, once again, lead to farmgate prices which provide inadequate incentives for jute production in the medium-term. The Public Foodgrain Distribution System 1.33 The experience of 1984 has also served to emphasize the desirability of continuing the food policy reforms of recent years concerning foodgrain procurement, price stabilization, reducing the volume and subsidization of food rations, increasing the share of public food distribution to the poorest groups and providing effective relief following natural disasters Procurement prices for foodgrains have been adjusted regularly, with announcements in advance of crop planting, in order to provide incentives for increasing agricultural production through yield improvements. At the same time, the focus of procurement operations has been shifted from that of ensuring a target level of public stocks to that of ensuring an adequate "floor price" to farmers. It has been recognized that during times of scarcity, an attempt to replenish public stocks through ambitious enforced domestic procurement targets would only serve to exacerbate grain shortages, while an attempt to increase procurement by offering considerably higher prices for sales to the PFDS as market prices rose would tend to drive market prices even higher, causing hardship to the most vulnerable groups in the community. It should also be noted that in recent years procurement prices for rice have risen faster than world prices for rice. In future years it may not always be possible to ensure producer incentives simply by passing on all increases in costs; it will be increasingly important to improve access to and the adoption of agronomic practices leading to increased yields GOB's ability to intervene effectively in the market to stabilize foodgrain prices has been constrained during the past three years by the limited reserves of public foodgrain stocks and the pre-emptive claim of the ration system on the stocks available for distribution. Despite the reductions in access to rations and weekly entitlements, the allocations to statutory rationing, priority groups and for modified rationing taken together still account for about two-thirds of all food distribution. Although the rate of subsidization has been substantially reduced over time,

30 -16- sales through the ration system are still subsidized relative to market prices or relative to the full cost of domestic or external procurement In recent years, COB has also increased the volume of foodgrain distribution targeted towards the poorest groups, through programs such as food-for--work (FFW), vulnerable group feeding (VGF) and relief programs. This redirection has been encouraged by food aid donors, in some cases by the earmarking of food aid for such programs. The desirable increase in these programs together with the cogmitments to the ration system does mean, however, that only a residual share of around 10% of foodgrain distribution remains for open market sales (OHS) to stabilize foodgrain prices. The ; limits on OHS, paradoxically, tend to perpetuate the demand for the ration system in the absence of an assurance of reasonably stable market prices The constraints on OMS operations were severe during With average market prices much higher (by 36% for rice and 19% for wheat, than ration issue prices which were not increased during the year,l/ the demand for grain distribution from the PFDS was considerably higher than in the preceding year. During the July-November 1984 period ration offtake was nearly 300,000 tons higher (at 840,000 tons) and relief programs close to 200,000 higher (at over 300,000 tons) than in the preceding year, while open market sales could only be boosted from 60,000 tons to 160,000 tons. Consequently, in contrast to the more successful FY83 experience, OHS operations could not exert a significant influence on market prices during the early part of FY Options for improving the scope for market price stabilization could include the following. Firstly, the modified (MR) ration system, which does not benefit a wide section of the rural population, could be assigned a lower priority relative to OMS at the local level. Under such a proposal, when market prices rose above the levels signaling the need for OHS sales in a certain area, then MR sales would cease until prices once again fell to below these "trigger prices". Secondly, further actions could be taken to reduce the rigidities imposed on the PFDS by sales to those entitled to statutory rationing (SR) or belonging to priority groups (PG). Further significant reductions in SR and PG allocations will only be feasible, however, if pricing policies are adjusted to reduce the incentives for drawing on these schemes. The SR and PG schemes together cover less than 10% of the population: the costs of assuring stable prices to these groups are borne partly by GOB to the extent that subsidies are involved and partly by the 90% of the population which is not covered by these programs, since the priority given to the ration system impedes seriously GOB's ability to stabilize prices during foodgrain shortages through expanded open market sales. Consideration should be given to making SR and PG issue prices more similar 1/ Rice ration prices were adjusted upwards by 14Z on January 1, 1985, but wheat ration prices have not been adjusted since December 1983.

31 -17- to OHS prices: i.e., equal to market prices if these are below OKS trigger prices, and at least equal to these trigger prices if market prices rose above these levels. Finally, since GOB's foodgrains sources are largely wheat, consideration should be given to the reduction and gradual elimination of the rice component of the ration system, thereby releasing more rice for channeling through OHS. It should be noted that the effective stabilization of rice prices would benefit all consumers, including those in the SR and PG categories who already buy the majoritv of their foodgrain requirements on the open market. Industry 1.39 Industrial output rebounded sharply during FY84, increasing by 13.6% compared to a 6.5% decline in FY83 and almost zero growth in FY82. The improvement of GOB's industrial policies played an important role in allowing the sector to respond positively to the resurgence of demand. The more liberal access to imports of capital goods and raw materials through the WES market has been of particular importance, emphasizing the need for careful management of this market in future To place the recent recovery into context, Chapter 5 reviews the structure of Bangladesh industry and its performance over the past decade. dihile there have been substantial fluctuations in performance, the average growth of output between FY74 and FY84 has been less than 6Z p.a. The growth in real value added has been substantially lower at only 1% p.a. over the same period. The share of value added in gross output declined from 0.5 in FY74 to 0.33 by FY82, largely due to input prices rising faster than output prices Until quite recently, the Government has been either the producer, the distributor or the buyer of the bulk of the products of large scale industry as well as exercising close control over the limited role of private firms in the sector. Production for government-generated demand played a major role in industry during the 1970s, leading to serious structural problems in industry once the rapid real growth of the ADP could no longer be sustained due to resource constraints. These constraints will continue to be severe for the foreseeable future and there are also clear limits on the proportion of government-generated demand that can be met efficiently from domestic sources. Accordingly, the structure of industry will need to be adapted over time to cater for a growth of demand generated by increasing agricultural incomes, expenditures generated by the inflow of remittances and the growth of non-traditional exports Recognizing the limits on government-led industrial development, GOB announced its New Industrial Policy (NIP) in mid The objectives of the new policy framework were: to improve the efficiency of public enterprises; improve the environment for the private sector; to encourage the dispersal of industries towards backward areas and to expand employment opportunities in industry. Nearly 110 major public sector units have been divested in order

32 -18- to reduce the burden on public sector management. The remaining corporations have been regrouped along clearer functional lines and a strengthened management information system is being set up to monitor the performance of the public industrial units. The financial position of these units has been strengthened in many cases by a restructuring of their capital as well as their increased autonomy in setting prices. While it is too early to assess longer-term imoact of these measures, there has been a clear improvement in the profitability of the public corporations since FY82, with a corresponding decrease in their borrowing requirements Measures to improve the economic environment for private industrial activity in the context of the NIP include: incentives for accelerating investment; export promotion; import liberalization; and industrial finance. COB has also announced its intention to dismantle over time all controls on licensing private investments. Only six industries are now reserved for the public sector while the number of industries in which explicit investment sanctions are required has been reduced from 91 to The most important incentive for increasing exports has been the exchange rate policy adopted in 1982, which, if applied consistently, should avoid an appreciation of the real effective exchange rate. The Export Performance Licensing (XPL) schemes have also been used creatively to allow a more efficient allocation of ecarce foreign exchange for essential inputs needed by exporters, while an import duty drawback scheme introduced in 1982 has been gradually streamlined. More recently, access to duty drawbacks has been extended to firms producing goods for aided projects, where GOB is reimbursed for purchases in foreign exchange. The terms and availability of export credit have also been enhanced. These incentives have contributed to the growth of non-traditional exports of 11.4% in FY82, 19.5Z in FY83 and 43.5% in FY84; the projections for FY85 indicate the continuation of this positive trend Turning to import liberalization, the secondary market for foreign exchange has been broadened. The share of non-aided imports purchased through the secondary exchange market rose to over 40Z in FY84.1/ On the other hand, only a modest beginning has been made towards the rationalization of the protection system through reducing the widely differing degrees of protection sometimes afforded to similar products. Some useful steps were taken in the context of the FY84 Budget and further rationalization may follow GOB's review of the findings of the Trade and Industrial Policy Reform (TIP) team of consultants who have been commissioned by GOB Industrial finance has been carried out primarily by the Bangladesh Shilpa Bank (BSB) and Bangladesh Shilpa Rin Sangstha (BSRS). These two 1/ Imports financed by aid disbursements are all channeled through the official foreign exchange market.

33 -19- institutions have experienced severe financial problems, primarily because of a very poor record of loan recoveries. Their mounting arrears can be attributed to inappropriate criteria for project selection and to a general environment in which financial obligations have not been expected to be enforced. In such an environment, the effective price of capital is lowered close to zero, so it is not surprising to find considerable misallocation of scarce capital often reflected in underutilized capacity. A UNDP-financed institutional review and portfolio audit of BSB and BSRS was completed in In consultation with a number of donor agencies, GOB has drawn up a program of action aimed at reorganizing and improving the efficiency of these development finance institutions and to improve loan recoveries. Unless this action program is implemenced effectively, the weaknesses of the industrial finance system will continue to distort and undermine the objectives of the New Industrial Policy. Energy 1/ 1.47 Three types of problems are contributing to the difficulty and high costs of meeting the growing energy needs of Bangladesh. Firstly, there are tightening constraints on the availability of wood and other traditional fuels which are estimated to supply close to two-thirds of total energy consumption. Secondly, a large proportion of commercial energy needs continue to be met from oil imports and, finally, there is a considerable degree of inefficiency in the use of domestic sources of comercial energy The balance between the supply and demand for traditional energy resources is difficult to quantify but is clearly deteriorating given the very limited forest endowment and stagnating or declining availability of crop and animal wastes. A massive tree planting program for rural areas combined with programs to improve the efficiency of traditional energy use is needed to deal with these problems. Turning to commercial energy, there have been no discoveries of petroleum and the commercial potential of coal, peat and hydropower are quite limited. However. Bangladesh has substantial gas reserves which are presently estimated at about 10 trillion cubic feet (TCF). These reserves could contribute significantly to improving the country's severe commercial energy deficit and balance of payments problems if they were efficiently developed and the additional energy made available was then efficiently utilized. At present, there are substantial losses in the conversion, transmission and distribution of electric power, frequent and costly power outages, losses and inadequate security of supply of natural gas, an imbalance in the pattern of domestic demand and the output of the domestic petroleum refinery as well as considerable scope for improving the efficiency of energy use in industry. 1/ This economic report does not contain a chapter on energy: the following paragraphs set out a number of recent developments and important policy issues.

34 The existence of natural gas reserves and their relatively low development costs (owing to unusual'ly high well productivity) offer Bangladesh an attractive opportunity to build up a reliable and comparatively low cost base for meeting the bulk of the nation's commercial energy needs. GOB is aware of this potential and the main objective of its energy policy is to reduce dependence on oil imports by accelerating the development of domestic gas resources and increasing the economy's absorptive capacity for gas. Recognizing the technological and economic limits to the substitution of liquid hydrocarbons by natural gas, GOB is also attempting to intensify the search for oil and has undertaken a program of seismic surveys and geological studies which will form the base of a promotion effort aimed at attracting participation in exploration by international oil companies to help accelerate the pace of exploratory drilling Gas reserves, while abundant in relation to the country's present requirements, are poorly defined and further exploration, particularly west of the Jamuna River, should be given a high priority alongside the further development of proven reserves. Gas production in Bangladesh commenced with the completion of the discovery wells on the fields closest to markets, followed by a few wells drilled next to the discovery wells as extra gas was needed. While this has been a sufficient basis for the limited development of the gas fields to date, the paucity of reservoir information is emerging as a major constraint to further development since only a fraction (approximately 4 TCF) of the total presumed reserves (of TCF) are proven: the rest has yet to be found. The gas sector is entering a critical transition phase, passing from a period in which the limited information available from discovery wells was a sufficient basis for producing the small amounts of gas required, to a full development phase designed to supply large quantities of gas over long periods. While there is good reason for confidence that sufficient reserves exist to support substantial further expansion, these additional sources must first be located precisely and proven. Maintaining a growing and reliable supply of gas at the lowest practical cost over the medium and long term will require the maintenance of a wide margin of proven but not yet developed reserves through a balanced drilling program which does not neglect the need for appraisal wells in addition to development wells The gro-wth of commercial primary energy demand averaged 7.3% per year between FY78 and FY82. There were substantial yearly fluctuations arourd this trend and commercial energy demand actually declined by 4% in FY83, mainly due to depressed economic conditions. The recent economic recovery then contributed to a 12% increase in energy consumption for FY84. Natural gas has continued to replace imported petroleum during this period: petroleum demand declined by 7%, while natural gas demand grew by 70% during the past four years. However, petroleum imports are still very costly to the economy, equivalent to about 452 of total merchandise exports. Currently, total commercial primary energy demand is about 3.6 million metric tons of oil equivalent. This demand is met mainly from natural gas (52%) and

35 -21- petroleum (41Z), with coal, hydro-electricity and other sources accounting for 7% Energy pricing: There is a wide variation of prices for various commercial energy sources in Bangladesh, ranging from Tk 485/metric ton of oil equivalent (toe)l/ for gas sales to power stations and fertilizer plants, to over Tk 20,000/toe for premium gasoline. Within this range, natural gas prices are the lowest while, in contrast, petroleum product prices are all well above border (c.i.f.) prices. Despite the price increases implemented in recent years, gas prices to bulk and domestic users remain well below the economic costs of delivering gas to each of these groups. Electricity tariffs should also cover the long-term marginal cost of supply, which involves massive infrastructure investments as well as fuel and other costs. While precise estimates for LRMC are not available, present tariffs are below currently available estimates, particularly for low voltage (including residential) users for whom the costs of delivery are substantially higher than the corresponding costs for bulk users. It is recognized that small users may find it hard to afford to pay the full long-term marginal cost of electric power. On the other hand, it is not easy to justify continuing subsidies to these consumers when the cost of such subsidies is ultimately borne by the rest of the population who do not even have access to electricity Since the Bangladesh Power Development Board and the gas utilities both need to make large investments to meet rapidly growing demand and recognizing that only a relatively small fraction of the population benefits directly from gas and power development while natural gas is the country's only major natural resource, there is a strong case for upward adjustments of gas prices and power tariffs. Raising natural gas prices to levels which cover the economic costs of extraction, distribution, and depletion is urgent; at a later stage any surplus revenue that could be generated without deterring the pace of substituted gas for more expensive fuels or slowing the pace of industrial development could also provide a welcome contribution to incremental domestic resource mobilization. The level and structure of power tariffs also needs urgent attention if an adequate share of BPDB's investment needs are to be met from internal cash generation and the structure of tariffs is to reflect more closely the cost of delivery to various types of users. 1/ The metric ton of oil equivalent here is taken to be 10 million kcal. Conversion factors for the various fuels are given in the notes to Statistical Appendix Tables, Section 8.

36 -22- Development Administration 1.54 Decentralization: Chapter 6 of this report deals with several of the development administration issues raised in the 1984 Country Economic Memorandum, with particular emphasis on the process of decentralization of powers and responsibilities to the Upazilas. During 1984, GOB's attention was focussed on making decentralization operational: appointing staff at all levels, constructing office and living quarters, training the new local government officials, working out the details of assigning ministry officials to the Upazilas and developing a means of monitoring the planning process and expenditures at the Upazila level. The sub-division level of administration has been eliminated by upgrading them to districts. The basic administrative machinery is now in place; the only major remaining step to be taken is the election of the Chairmen of the Upazila Parishad (Council). While substantial progress has been made in terms of implementing administrative changes, the realization of the development objectives of decentralization will require effective solutions to a number of remaining issues Pending the election of Chairmen, the Upazila Nirbahi Officer (UNO) has had to play the role of Acting Chairman as well as Executive Officer, resulting in an extremely heavy Load of work and responsibility. The successful performance of these functions would require that the UNOs be given adequate and thorough training together with an appropriate role relative to other local officials. The existing two-week training and orientation course for UNOs is not sufficient and will need to be supplemented. Steps will also need to be taken to assign grades and salaries to UNOs which are more comensurate with their expected leadership role. Below the UNO level, the desired strengthening of the technical and managerial capability at the Upazila level has also been hampered by the limited availability of suitably qualified staff: the creation of 46 new districts by the upgrading of sub-divisions has further strained the limits of staff resources The FY84 ADP allocated Tk 1,660 million for development assistance to the Upazilas. A little over half of these funds were spent and the rest were carried forward to FY85. It is intended that allocations to Upazilas should be related to a weighted average of measures of population (50), area (1OZ), extent of backwardness (20%) and performance (20%). However, it did not prove possible to apply this formula for FY85 and equal allocations of Tk 5 million were provided to all Upazilas. When combined with funds carried over from FY84 and the increased allocations of wheat under the Food-for-Work Program, the total resources available to Upazilas from the central government in FY85 will be over 10% of the ADP Upazila Parishads are also expected to add to their own resources from locally revised revenues, especially for maintenance and recurrent expenditures. The revenue sources available to them are, however, quite minor in potential and the revenues from these sources (including fees for fairs, leases and tolls) have to be shared with the Unions within these Upazilas. Unless the Upazilas are given additional and more significant

37 -23- sources of revenue, they cannot be expected to make meaningful progress towards their stated development objectives. In order to provide Upazilas to make a serious effort to raise their own funds, it would be reasonable to reflect their revenue mobilization efforts within the formula for the allocation of grants from GOB's Upazila Development Fund During FY84, Upazila ADPs were drawn up, based on Planning Commission guidelines. Reports submitted by the Upazilas indicate that there was general adherence to the guidelines for sectoral allocations. Monitoring of Upazila development expenditures is to be carried out by the Deputy Commissioner (the highest ranking official at the district level). The central ministries have been given a peripheral role in monitoring reports from the Upazilas, with occasional visits by senior officers. Small monitoring units have also been set up in the Local Government Division, the Cabinet Division as well as in the Planning Commission. The experience to date has shown that many Upazilas need some assistance in initiating ideas for local development programs. It would be highly desirable for the Central Government to take a positive role in this process, rather than a passive one of relying only on adherence to detailed guidelines and on formal training courses. It may prove worthwhile to build up a small number of well-trained teams of central government officials who could visit Upazilas regularly and assist them to formulate programs, design projects and to train local level staff through this process. Such visits would also provide an opportulity to monitor and evaluate local programs and to transfer knowledge and experience from one Upazila to another Public service compensation: During 1984, GOB has also begun to address the important issue of public sector compensation, recognizing that the real value of public salaries has been considerably eroded by inflation over the past decade. An initial round of public salary increases of around 30Z were awarded in May 1984 and GOB's review of the recommendations of the National Pay Commission will provide an opportunity for a considered and selective approach to further adjustments A viable longer-term strategy for public service compensation should address the issue of differentials which will need to evolve over time to reflect the significant differences between the responsibilities at the upper and lower end of the civil service and the alternative employment opportunities available to those with different qualifications and experience. Increased attention will also need to be given to the composition of the compensation package comprised of salaries, perquisites (such as free transportation) and the availability of some goods and services at subsidized prices. Partly in reaction to the squeezing of salary differentials the compensation of more senior civil servants depends to a substantial extent on benefits other than salaries. The gradual "monetization" of such perquisites could allow civil servants to allocate their disposable (as against notional) incomes more in line with their preferences. Many services, ranging from housing, water, sewerage, electric power, natural gas to foodgrains are available to civil servants and other (mostly middle-class) users at

38 -24- implicitly or explicitly subsidized prices. Such subsidies will be extremely hard to remove because of the perception that the purchasing power of salaries has been eroded over time. If the benefits conferred by means of these subsidies are considered essential, then serious consideration should be given to coordinated policy measures to improve salaries while, at the same cime, phasing out subsidies such as those on foodgrains and on public utilities. It must, however, be realized that improving the compensation of public sei-vants will be justified only if this leads to improved efficiency, for example in terms of accelerated implementation of development projects Project implementation: GOB has continued its efforts to speed up the process of project implementation along the lines discussed in last year's economic report. The number of projects in the ADP has been reduced further, progressively greater autonomy has been given to agencies directly responsible for project implementation and improving customs and fund release procedures. However, these measures have not been sufficient to avoid a continued shortfall of implementation performance. Disbursements of project aid for the FY84 ADP were estimated to be about Tk 12.2 billion, compared to the Budget estimate of Tk 15.2 billion. Performance has been inadequate in absolute terms as well as in relation to budget targets. Total project aid disbursements in FY84 were estimated at $552 million, which is lower than the corresponding FY81 figure of $560 million, while the closing pipeline of project aid has grown from $2.6 billion for FY81 to around $4 billion at the end of FY84. Project aid disbursements have not kept pace with growing needs nor with the increased availability of committed resources. This issue needs more serious and urgent attention if additional commitments of project aid are to be justified. With the expected tight constraints on the availability of financial resources during the Third Five Year Plan period, more effective actions will need to be taken to ensure that administrative constraints do not act as a further impediment to project implementation.

39 -25- C. MEDIUM-TERM PROSPECTS AND ISSUES FOR THE THIRD FIVE YEAR PLAN 1.62 The preparation of the Third Five Year Plan (3FYP) provides an important opportunity for clarifying GOB's priorities and sectoral development strategies. A serious and professionally prepared plan, set in a longer-term perspective, could play a valuable role in strengthening domestic and external support for the nation's development strategies. To be useful in this regard, the plan will need to be a realistic one which recognizes the limits on the resources likely to be available over the 3FYP period from FY86 to FY For the next few years at least, the constraints on highly concessional assistance, including IDA, will be so severe that it would not be realistic to base the next plan on any increases in the real value of aid commitments. Consequently, given the importance of aid flows in Bangladesh's balance of payments, the outlook for the next five years is not bright. The scope for economic growth will be severely constrained, as it has been for much of the period since independence, by the capacity for financing imports. Without being able to rely on continued increased aid commitments, the challenge facing Bangladesh is to seek to maintain at least a modest real growth in investment and in GDP, so that at least some increase in incomes per head can be sustained during the coming years The projections to FY90 presented in this report suggest that it should be possible to r-aintain the 3-4Z p.a. trend in GDP growth which has been recorded over the past five years. Since population growth is in the order of 2.6Z p.a., such an economic growth trend would provide for only a very slow improvement in the extremely low incomes per head in Bangladesh. While the Government and the international community should be reluctant to settle for such modest growth, it has to be recognized that even the maintenance of such a limited rate of economic progress will require sustained and strenuous efforts Over the next few years it will be essential for Bangladesh to maintain the welcome pace of export growth recorded during the past three years, with a particularly rapid increase in non-traditional exports, such as readymade garments. Aid donors, on their part, could assist this process by minim zing the restrictions placed on such exports to their countries from Bangladesh. It will also be necessary to continue the drive for import replacement of foodgrains by improving agricultural yields and reducing the need for petroleum and nitrogenous fertilizer imports through the further development of the nation's natural gas resources. To support these efforts to contain the large trade deficit, the capital account of the balance of payments can also be strengthened by faster project implementation which would, in turn, improve the base of infrastructure for future economic growth. If project implementation performance can be stepped up, it will be possible to maintain some real increases in distursements of external assistance even if commitments do not increase faster than inflation during the next five years. Finally, increased import capacity and growth could be

40 -26- boosted if there were some shift in the "mix" of external assistance towards an increased share of commodity and/or program type assistance. Such a shift in the pattern of assistance will be justified provided that COB, on its part, strengthens its commitment to accelerate domestic resource mobilization The expected limits on the availability of external assistance will also constrain the growth of public expenditure during the next plan period. There is considerable scope for more effective utilization of existing assets, but there is also a great need for investment in public infrastructure, ranging from power generation to improved communications. In both cases, additional resources will be required and will need to be generated, to an increasing extent, from domestic sources. While increased domestic resource mobilization is clearly desirable, expectations should again be tempered with realism. The low level of incomes and weaknesses in the administrative structure have prevented significant improvements in domestic savings and domestic resource mobilization during the past decade. Even with a firm COB commitment to achieve better results during the 3FYP period, these limitations could not be removed overnight. The scope for public investment will also be limited by the need to give increased emphasis to the operation and maintenance (O&M) of existing assets. There is increasing evidence that the severe reduction in public servants' compensation since independence has adversely affected the capacity of the administration while the relative neglect of O&M expenditures has resulted in a deterioration of the nation's physical assets. This imbalance should begin to be redressed in the Third Five Year Plan. Taking into account the limits on overall government resources, together with the need to enhance recurrent expenditures, it is not likely that the average rate of growth of ADP expenditures during the 3FYP can exceed 4Z p.a. in real terms. In viaw of these considerations, the emphasis of public expenditure over the next Plan period could be appropriately placed on consolidation and maximization of benefits from past idvestments, rather than on over-ambitious plans for new projects Chapter 7 (Volume II) of the report presents some alternative projections of available resources for the 3FYP period. Projections of balance of payments prospects are based on assumptions regarding the expected availability of external assistance combined with expected trends in domestic foodgrain production and import requirements. Project zns of budgetary resources from external and domestic sources and the allocation of these resources are also discussed in Chapter 7, based on a clnsolidation of the revenue (recurrent) budget, the ADP and the food budget. Prospects for external assistance 1.68 Starting from the presently high degree of dependence on external assistance, the prospects for economic growth for the 3FYP period will depend crucially on the likely availability of external assistance. Aid commitments to Bangladesh increased substantially during the first ten years of independence to FY82. However, there has not been a further discernible upward trend

41 -27- in commnitments during the past 3-4 years. In view of the tight constraints on highly concessional forms of assistance from all sources to all developing countries, it would not be realistic to base medium-term resource projections on an increase in the real value of commitments reached in FY Accordingly, it has been assumed that total aid commitments over the next five years will remain constant in real terms (i.e., keep pace, in US dollar terms, vith the expected inflation in the prices of manufactured exports to developing countries also measured in US dollar terms). Food aid is assumed to be constant in volume terms beyond FY86 at the pre-flood FY84 level. Project aid commitments are proposed to grow at 5-6Z p.a. in nominal terms from their FY84 level: this would imply a slight decline in real terms over the projection period. Commoditylprogram type aid commitments are recoummended to increase relatively faster, at around 8.5-9% in nominal terms (or by around 1.5-2Z in real terms) from their FY84 level of $546 million. This would require a $60 million average increase in commodity aid co itments in each year and would result in a modest shift in the share of commodity aid commitments from 32Z in FY84 towards 36Z of total aid commitments by FY90.1/ 1.70 Disbursements which _ould follow from such a constant real trend in total new aid comnitments to Bangladesh will depend, to a considerable extent, on the ability of the Government to improve the pace of disbursements cut of the sizable pipeline which has been built up from past commitments. The pace of disbrr'ements will also depend on the allocation of new aid commitments between projects and faster-disbursing non-project forms of assistance. As described in Chapter 7, provided GOB is successful in speeding up disbursements and there is a modest shift in the balance of new aid commitments in favor of commodity or program type assistance, there could be a continuation of real increases in total aid disbursements during the 3FYP, at about 3% p.a., even if total aid commitments level off in real terms over the coming years Such a growth of disbursements cannot be taken for granted. As discussed above, GOB's recent efforts at speeding up project implementation have not been markedly successful and a very determined administrative effort will be required to break out of the recent pattern of performance. Moreover, government efforts to improve the rate of project aid utilization will need to be supplemented by a higher share of coumodity/program assistance which would: (i) facilitate faster project aid disbursements by augmenting the availability of local currency resources generated by counterpart funds; 1/ Details of recommended aid commitments are set out in Tables 7.1 and 7.2 and are discussed in more detail in Chapter 7).

42 -28- (ii) increase the resources available for essential operation and maintenance expenditures; and (iii) help avoid disruptions in the availability of essential imports due to shortages of foreign exchange. Nevertheless, in spite of these considerations, the recent shift in commitments has been in the opposite direction, towards more project aid; this trend towards a greater share ef project aid appears to have continued during FY85. Unless the shift can be reversed in future, the foreign exchange constraints on growth will be even tighter during the 3FYP period. The availability and distribution of foodgrains 1.72 Notwithstanding the increases in foodgrain production which have taken place during the past decade, substancial foodgrain imports continue to be required. Therefore, the likely need for foodgrain imports will also be an important determinant of the balance of payments as well as of the budgetary outlook for the foreseeable future. Consequently, the ability to maintain a steady pace of increase in foodgrain production ahead of the rate of growth of population will remain as a central strategic issue for the 3FYP period. Without vigorous agricultural growth, there would be little scope for increasing productive employment opportunities and the nation's balance of payments would be undt mined. In addition to ensuring adequate supplies, the system for public distribution of foodgrains will also need to be reoriented to protect the most vulnerable groups in the population. Policies with respect to the management of the Public Foodgrain Distribution System (PFDS) will also have important implications for fiscal management, while the future of food aid will remain as a crucial determinant of both fiscal and balance of payments prospects. In particular, it should be recognized that a redirection of the PFDS towards those who lack the purchasing power to secure their nutritional needs from the market will have a negative financial impact on the food budget which will only be sustainable if there is a continuation of food aid even as foodgrain self-sufficiency (in an aggregate sense) is gradually approached Foodgrain import requirements are projected on the basis of an assumed 4% p.a. average increase in domestic foodgrain production; a minimal target of around 16 oz./head per day availability of foodgrains and the rebuilding of public foodgrain sto:ks to a minimum l--del of 1.25 million tons at the end of each financial year. Food aid levels are projected to be constant at 1.5 million tons from FY87 onwards, following somewhat higher levels during FY85 and FY86 as a consequence of th1e recent floods. Under these assum2tions, coami-rcial import requirements from GOB's own resources would decline gradually from over 1 million tons in FY85 to quite low levels by the end of the 3FYP period. Domestic procurement is projected to be in tht! range of 300,000 to 400,000 tons per year.

43 The pattern of offtake from the PFDS is projected to be in line with the continuation of recent policy directions, with a shift in emphasis away from the ration system in favor of expanded open market sales and increased distribution through the Food-for-Work (FFW) and Vulnerable Group Feeding (VGF) programs. Under these assumptions, the food budget will have a cash deficit over the next two years. The subsidy element of ration sales is projected to be eliminated gradually; however, the counterpart funds generated by the resale of some of the aid-financed imports through the ration system or open market sales are projected to be more than offset by the cost of imports from GOB's own resources and the burden of the debt incurred by food purchases during FY84 and FY85. Once the recently incurred debts for food have been repaid, the food budget should again generate cash surpluses, provided that food aid levels are maintained. On the other hand, if food aid were to decline to 1 million tons by FY90, then the cash deficits of the food budget would widen once again to around Tk 1.5 billion by the end of the plan period, unless the FFW and VGF programs were correspondingly curtailed. Balance of payments prospects 1.75 Section E of Chapter 7 draws together the projections of external assistance and foodgrain imports described above with projections of other key balance of payments variables in order to present alternative balance of payments prospects for the 3FYP period. These projections show that even under rather optimistic assumptions, the capacity for imports, on which economic growth depends heavily in Bangladesh, will be very tightly constrained during the coming five years Debt service obligations are projected on the basis of avjilable information on past concessional aid, food loans and IMF purchases. Remittances are assumed to remain constant in real terms, which may prove to be an overly optimistic assumption in view of their recent decline. Exports of jute and jute products are assumed to grow at a trend of 2.5Z p.a. in volume terms, but a fall in value terms is expected as world jute prices decline from their present peak levels. Exports of other primary-based commodities (tea, leather and marine products) are assumed to increase by 3-5Z in volume terms. Non-traditional exports are projected to maintain their recent vigorous growth: exports of ready-made garments have increased from close to zero in FY82 to an expected $8O million in FY85. Accordingly the exports of a gradually more diversified range of manufactured exports are projected to increase by 18% p.a. in real terms during the next five years. This is a very ambitious target, but may be attainable with the help of sound export promotion policies, since the present base is extremely small. Imports of foodgrains are projected to decline as foodgrain production is assumed to increase relative to population growth. Imports of fertilizers and petroleum are projected on the basis of assumptions regarding total demand and continued import substitution. Capital goods imports are related to project aid disbursements and a modest projected increase in private sector investments. Imports of other intermediate and final goods are then

44 -30- projected as a residual which is determined by the capacity to import, consistent with the need to maintain at least a minimal level of foreign exchange reserves Despite relatively optimistic assumptions concerning commodity assistance, remittances and exports, Table 1.1 indicates that imports will be tightly constrained over the coming years. The total capacity for imports in FY86 and FY87 will be considerably lower in real terms than the expected $2.8 billion imports for FY85 which were made possible by a rundown of reserves as well as substantial borrowing for foodgrain imports. In the absence of any special balance of payments assistance, the scope for imports of intermediate and final goods would be severely disrupted in the initial two years of the Third Five Year Plan. Special balance of payments assistance in the order of $100 million in FY86 and $50 million in FY87 would therefore be desirable in order to minimize the disruption in import capacity. Nevertheless, even with such support combined with a decline of food imports, the capacity for financing non-food imports (including capital, intermediate and final goods) is projected to decline to some extent in FY86 and may not recover to their FY85 level in real terms until well into the 3FYP period The average rate of growth of non-food imports in real terms is expected to be about 1.5Z p.a. during the Third Five Year Plan period. Moreover, as discussed in Chapter 7, the capacity for such imports could be depressed even further if less optimistic assumptions were made concerning domestic foodgrain production, increases in non-traditional exports, the future of remittances and the availability of fast-disbursing (food, commodity or program) assistance over the next few years Such a tight constraint on the capacity to finance imports will, in turn, limit the scope for growth in non-agricultural GDP. The linkage between imports and non-agricultural value added is not fixed in the short term; for example, increased use of existing industrial capacity and improvements in productivity which could result from the speedy completion and effective operation of development projects could permit non-agricultural value added to increase faster than imports. However, given the absence of most raw materials for non-agricultural production, it would not be realistic to expect a sustained growth of such production and value added which is consistently and substantially less dependent on imports for an extended period of time. If the rate of growth of non-foodgrain imports is 1.5% in real terms, or even lower under less optimistic assumptions, then it is not likely that an average growth trend of more than 3% p.a. can be sustained in the non-agricultural sectors. When combined with an assumed 4% p.a. growth of agriculture, this would imply that an overall growth rate of 3-4% p.a. for the 3FYP will be difficult to sustain.

45 -31- Domestic resource mobilization 1.80 The expected constraints on ezternal resources will also limit the scope for public expenditure unless GOB is able to mobilize additional revenue from domestic sources. There is a vast need for increased resources for the efficient operation of investments already made, ranging from irrigation schemes to primary schools, as well as for public investment in infrastructure to strengthen the basis for future growth. Since continued real increases in development assistance cannot be expected in the foreseeable future, the need for increased domestic resource mobilization is urgent. In view of the modest growth prospects, it will not be adequate to rely simply on the gradual broadening of the tax base. Measures should also be taken to tap the potential for mobilizing additional domestic resources through a combination of: - increased cost recovery for government services; - increasing the proportion of public sector investments financed from internal cash generation; - improving the profitability of public industrial enterprises; and - reducing subsidies. None of these can be regarded as easy options, but given the enormous needs for improving the standard and coverage of almost all of the services presently provided by the public sector, there is a compelling case for making more effort than in the past The projection of domestic resources in Chapter 7 assumes that the gains from new revenue measures over the 3FYP period will average 0.4% of GDP for each year. This would allow domestic resources to grow slightly faster than the projected increase in aid disbursements whose share in GOB's total resources would decline slightly, from 41-42% in FY86 to 39% by FY90. The scope for public expenditure 1.82 In the fiscal projections for the 3FYP period, the resources available for ADP financing are derived after making allowance for a 102 p.a. real increase in O&M and salary expenditures which would begin to make good the erosion in recurrent expenditures over the past decade. This would reverse the past trends when recurrent expenditures were unduly squeezed to allow a relatively more rapid growth of the ADP. Under these assumptions, the ADP is projected to increase by about 15% p.a. in nominal terms, representing approximately 4Z p.a. average increase in real terms over the 3FYP period. For a number of reasons set out in Chapter 7 (paragraph 7.49) it will be difficult to achieve any real increase in the AVP during FY86, unless a particularly vigorous resource mobilization effort can be included in the FY86 Budget.

46 Even such a modest average growth of public expenditure is contingent not only on a sustained domestic resource mobilization effort, but also on a change in the "mix" of external assistance. If the proportion of commodity aid to project aid commitments remained at the present level, then the ratio of available local currency contributions to aided projects would decline substantially over the plan period, despite the projected vigorous domestic resource mobilization effort by GOB. Such a relative decline in the availability of local currency would tend to undercut efforts aimed at faster project implementation. As the experience of the early 1980s has shown, a shortage of local currency (generated by a combination of domestic revenues and counterpart funds from commodity/program assistance) can be a serious impediment to project implementation. The ability to absorb increased amounts of project aid and the projected modest growth of the ADP will be manageable only if there is a significant shift in the ratio of aid disbursements in favor of commodity/program assistance, or a sharp increase in the share of total project costs financed by aid, or a combination of both It must be stressed, however, that increases in the share of aid financing of total project costs would be possible only if GOB, on its part, was able to demonstrate clearly that a reduction in its financial contribution did not result in any corresponding reduction in its commitment to implement the projects concerned. Similarly, a case for increased comodity assistance will be justified only if GOB is able to demonstrate by results, its own commitment to increased domestic resource mobilization. A combination of domestic efforts and external support will be recquired to deal with the medium-term and longer-term pressures facing Bangladesh. The recommendations for external assistance for FY86, which are summarized in the next section, are set in the medium-term context of the Third Five Year Plan period.

47 -33- D. RECOMMENDED AID COMMITMENIS FOR FY Due to a combination of factors discussed above, including the severe floods during 1984, Bangladesh's balance of payments has deteriorated over the past year so that the level of foreign exchange reserves at the end of FY85 is forecast to be no more than a minimal six to seven weeks' coverage of imports. The pressure on the balance of payments is expected to remain severe during FY86, but there will be no scope for any further significant drawdown of reserves. Following the depletion of foodstocks in the aftermath of the floods, foodgrain imports of around 2.25 million tons, costing around $470 million, are anticipated to be required in order to rebuild foodstocks to a safe level by no later than the end of the next fiscal year. World market prices for jute and tea exports are expected to decline markedly from their currently high levels. In these circumstances, even if there is a continuing rapid growth in non-traditional exports and no further decline in remittances, the capacity for imports is projected to be tightly constrained during FY86.1/ 1.86 The pursuit of sound macro-economic policies by GOB could help to ease balance of payments pressures. Improved demand management will be crucial, including the avoidance of excessive private credit expansion and of bank-financed budgetary deficits. A substantial resource mobilization effort in terms of new budget measures will be required to offset the reduction of revenues which would follow from an unavoidable reduction in imports. Such efforts by GOB would warrant support from the aid community in order to avoid an unduly constrained import capacity during the initial year of the Third Five Year Plan period The aid recommendations, summarized below and presented in Table 1.3 are set in a medium-term context and are designed primarily to set a trend which would permit at least some prospects for the growth of incomes per head during the 3FYP period. They would not, in themselves, be sufficient to meet all projected foreign exchange requirements for FY86 and special balance of payments support appears to be required during FY86 and FY87 to augment the likely disbursements of development assistance. The medium-term aid recommendations are based on the actual aid commitments of FY84, rather than those of FY85, for two reasons: firstly, information about aid commitments for FY85 is not yet complete; secondly, and more importantly, preliminary estimates suggest that commodity aid comnitments declined while project aid commitments rose in FY85. This pattern will need to be reversed in FY86. If serious balance of payments problems are to be avoided next year, then commodity aid commitments should be at least equal to, or preferably higher than, the $546 million committed in FY84. '/ Balance of payment prospects as well as aid recommendations for FY86 are discussed in more detail in Chapter 7, Section G.

48 -34- Table 1.3: External Assistance. Coumituents. Disbursements and Pipeline, 1Y84-FY86 (USS million, current prices) Non-projiect Aid Project Food Non-food Sub-total TOTAL Aid (Commodity) (Non-project) Undisbursed balance on July , Aid commitments FY ,712 Disbursements FY From pipeline From new comitments Undisbursed balance on July , ,317 Aid commitments FY85 1, ,833 Disbursements FY ,378 From pipeline ,072 From new commitments Undisbursed balance on July Aid commitments FY86 1, ,886 Disbursements FY From pipeline ,182 From new commitments Undisbursed balance on July

49 Food aid: In view of the expected tight balance of payments situation in FY86, it would not be desirable for GOB to have to finance a high proportion of the forecast foodgrain import requirements of around 2.25 million tons. It should also be noted that, with a debt service ratio of over 20% projected for FY86, the scope for further food borrowing is strictly limited. Accordingly, it is recommended that the volume of food aid remain at an above average level of 1.7 million tons, comprised of 1.55 million tons of wheat and 0.15 million tons of rice. This volume of food aid would be the highest since the difficult year of FY80, but would be justified in view of GOB's efficient handling of the flood situation in 1984 and the need to replenish foodgrain stocks to a level of 1.25 million tons by the end of FY Project aid: Project aid commitments have grown by about 9% p.a. during recent years, leading to a closing pipeline of project aid of around $4 billion. For the coming years, a 5-6% p.a. increase in commitments from the base of $880 million in FY84 is recommended, implying comuitments of around $1 billion for FY86. Provided the rate of disbursements from the available pipeline can be improved, project aid disbursements could increase by around 10% p.a. over the next few years Commodity aid: In order to shift the "mix" of assistance to Bangladesh in favor of more rapidly disbursing forms of assistance, it is recommended that commodity aid commitments should rise by just under 2% p.a. in real terms (or 8.5% in nominal terms) during the 3FYP period, so as to maintain a trend of total aid commitments which would be constant in real terms. This recommendation would imply an annual increase of around $60 million per year in commodity aid commitments, compared to annual increases averaging $65 million over the past five years. On this basis commodity aid commitments should be increased to around $575 million for FY These recommendations, taken together, would lead to total aid commitments of around $1,900 million for FY86, which should permit total aid disbursements to increase from about $1,375 million in FY85 to about $1,550 million during FY86. Provided these inflows were combined with some special balance of payments assistance, then it should be possible to minimize the decline of non-food imports from their expected higher levels of FY85. However, following the drawdown of reserves during FY85, it will be extremely difficult to avoid some decline in the capacity for imports in real terms during FY86. Therefore, the aid recommendations set out above represent no more than minimum requirements for the coming year.

50 -36- E. POPULATION AND LONG-TERM DEVELOPMENT PROSPECTS 1.92 Volume III of the report highlights the importance of the interactions between the growth of population and the prospects for long-term development in Bangladesh, paying particular attention to social sector issues ranging from poverty, employment generation, urbanization, education, health and nutrition. The prospects for improving the living standards of the growing population depend on the possibility of sustained rapid economic growth. At the same time, such growth can only come about if the abundant human resources can be combined with adequate land, capital and skills. Unfortunately, as noted at the outset, these vital ingredients for growth are in very short supply in Bangladesh and the rapid growth of population will make it very difficult to remove these scarcities. If living standards cannot be improved substantially due to the lack of adequate land, capital and the low skill Level of the population, then the conditions of poverty leading to poor health and high infant mortality will persist, perpetuating the underlying strong motivation for high fertility rates. In these circumstances, it will be extremely difficult to maintain progress in the effort to reduce the rate of growth of population to sustainable levels Chapter 9 presents the demographic background to the discussion of social issues, showing that even under the most optimistic plausible assumptions regarding the future decline of fertility, the total population of BangLadesh will increase by more than 60Z over the 30 years to 2015, while the working-age population will be close to doubled. This projection assumes that rate of adoption of contraceptive methods (contraceptive prevalence rate (CPR)) can be increased from less than 25Z at present to around 40% by 1990 and to over 60% by 2000 in order to reduce fertility from the presently very high rate to no more than a replacement rate over the next 15 to 20 years. It should be recognized that such a projection would imply an increase in the CPR over the next 20 years to a level of acceptance of family planning which has not been reached in any of the relatively successful Asian population programs except in China These optimistic projections, while not beyond the realms of possibility, may not be realized. If the population program is effectively pursued, it may be possible to reach GOB's target of a 40% CPR by However, further increases cannot be readily assumed. While there may exist sufficient latent demand for contraception under current socio-economic circumstances to allow the CPR to rise to 40%, any further progress will depend on improvements in the conditions which presently limit the demand for family planning. These circumstances will be very slow to change. Economic growth per head cannot be expected to be more than modest over the next twenty years; nor can it be expected that the rate of participation in the modern sector or the education levels of women of child-bearing age will be significantly improved over such a short period. The educational level of most of the potential mothers between now and 2005 is already largely defined since only half of the relevant age group of girls are in primary schools and only 15% in secondary schools. Accordingly, it will be extremely difficult

51 -37- to reach a CPR of 60Z in less than 25 years. Under such less optimistic assumptions the population would reach 140 million by 2000 and over 180 million by 2015, leading to a population density of over 3,000 per square mile.l/ 1.95 No matter what assumptions are made regarding fertility, the working age population (ages 10-64) will increase by over 30 million during the next 15 years: most of these people have already been born. On the other hand alternative projections of the rate of decline in fertility would have a very marked impact on dependency rates and on projected school-age populations. The rate of growth of urban population is much harder to predict: however, the increasing concentration of land ownership and the lack of adequate employment opportunities in agriculture do not provide any grounds for any sudden abatement in the presently high rates of urban growth. Even if urban growth rates were to fall steadily from the presently estimated 7Z p.a. to 5% p.a. by 2000 and 3.5% p.a. by 2015, the urban population would expand from less than 20 million at present to over 65 million by More than 1.5 million people would be added, on average, to the urban population in each year. Despite such growth, the absolute numbers in rural areas will continue to increase for the next thirty years, which means that BangLadesh faces massive problems in terms of seeking to avoid worsening conditions of poverty and under-employment in both rural and urban areas. Poverty and Employment Generation 1.96 The pressure of population on scarce resources of available land is leading to increasing landlessness, while the limits on agricultural employment opportunities have not been eased by a corresponding growth in productive non-farm employment. Consequently, the basic causes of poverty still remain and the symptoms of poverty are pervasive: the deteriorating standard of nutrition is perhaps the most striking manifestation of this problem Data from the Nutrition Survey indicate that the average intake of calories and protein among the poorest segments of the population has declined, suggesting that the modest increase in the average available foodgrains per head has not been evenly distributed among income classes. The presently estimated food consumption of low income groups ranges from 13X to 27% below requirements for small tenant farmers and for landless laborers, respectively. For one-third of the population, the daily intake of calories is only about 1500, which is considered to be the critical minimum required just to maintain body weight. Within families, women and children receive a 1/ Projections of population under all of the assumptions regarding fertility are based on a single assumption regarding mortality: life expectancy at birth is assumed to rise gradually from 49 years in to 62 years by

52 -38- less adequate diet than men, with serious adverse effects on the health of children at birth and during the most critical period of their development Rural poverty, poor nutrition and low rural wages are closely linked: because of the high incidence of landlessness, almost half the rural population depend on employment from sources other than their own land; however, agricultural wages have become depressed to bare subsistence levels. The limited available data suggests that the average real wages of agricultural labor in FY84 were only 67Z of the FY64 levels. While there have been fluctuations around this trend, the long-term decline can be attributed to the supply of agricultural wage labor, boosted by increasing landlessness, growing faster than the demand for such labor As already noted, despite the limits imposed by the available land resources, agriculture remains tle mainstay of the Bangladesh economy, accounting for 52% of CDP and 79X of total employment. Consequently, for the foreseeable future, maximizing growth in agricultural production will provide by far the most important contribution towards alleviating the massive poverty caused by the under-employment of the labor force. Accelerating the rate of agricultural output is, therefore, of the utmost importance for employment creation as well as for decreasing dependence on food imports. Increasing yields through the adoption of HYVs would also lead to an increase in the labor intensity of crop production. However, even under very optimistic assumptions about increased agricultural activity, no more than 25% of the expected growth in the labor force can be absorbed productively by the agricultural sector. Development strategies for Bangladesh will, therefore, also need to emphasize the promotion of productive employment outside of agriculture in both rural and urban areas To a limited extent, additional employment opportunities can be created through the provision of resources for the construction of infrastructure using labor-intensive methods. There are two major programs in Bangladesh for the construction of rural infrastructure -- the Rural Works Program CRWP) and the Food for Work Program (FFW). The allocation of food to these programs increased almost ten-fold over the past decade, to over 400,000 tons in FY85; the two programs together have the potential to generate over 100 million man-days of work in FY85. Even at this level, their impact on the total employment is quite limited. There is scope for further expansion, but the growth of these programs will be constrained by limits on the administrative capacity which would be required to ensure that the infrastructure constructed was of adequate quality as well as by the limits on available budgetary resources. Moreover, unless the flow of food assistance to Bangladesh can be maintained over time, significant growth of such programs will not be affordable. The development of industry will, therefore, be essential to provide a sustained increase in productive employment opportunities. However, because of the presently small industrial base and the high capital requirements of each job created, industry's contribution to employment creation will be quite limited for the foreseeable future. To sum up, the constraints implicit in the present demographic and socio-

53 -39- economic structure of Bangladesh indicate that only one-third or less of the increase in the labor force over the next 5-7 years can be expected to be absorbed in directly productive activities (about 20% in crop production, 6% in industry and 4% in infrastructure development). Another third could be expected to find work in the service sectors to support these productive activities. The rest will have to join the existing pool of unemployed and underemployed engaged in marginal activities, worsening the magnitude and intensity of poverty Recognizing the severity of this problem, the Government has encouraged a number of initiatives to generate incremental rural employment; these include the efforts of some NGOs as well as the work of the Bangladesh RuraL Development Board (BRDB). More recently GOB, in collaboration with IDA, has developed a new approach for boosting the employment and incomes of the rural landless. This approach draws on the experience of successful past efforts and may be tested in 15 Upazilas, beginning in FY The focal point of the proposed approach is the establishment of Employment Resource Centers (ERCs) at the Upazila level to provide or facilitate a number of integrated inputs: group formation, functional literacy, credit, market information, skills training and access to new technologies to target groups of rural landless in order to generate new economic activities. The ERCs are to identify the needs of target groups and prospective activities, then facilitate the access of these groups to credit from conmercial banks. For the strategy to be viable, it would be necessary for the ERCs to become self-financing after a brief establishment phase. This objective is essential not only to make it possible to replicate the approach once tested, but also to provide the incentive for effective performance by the staff of the ERCs: these would be employed by the local community. They would, therefore, have a strong interest in ensuring the viability of the productive efforts of the target groups who would own, operate and finance the ERCs Credit would be provided by the commercial banking system who would be induced to provide such financing by the assurance of adequate security by means of a guarantee fund and by being allowed to charge interest rates that would cover in full the cost of funds and operational overheads. At the outset, the guarantee fund will need to be funded by GOB; subsequently, it would be refinanced from guarantee fees on the loans to participatin groups. Such a new initiative could make a useful, albeit small, contribution to the problems of rural underemployment. Given the enormity of the numbers involved, it should be stressed that no single approach to the problem should be relied on as the optimal solution. A range of ideas should be promoted, in conjunction with the process of administrative decentralization in order to help create diversified income-earning opportunities for the growing number of landless in Bangladesh.

54 -40- Urban Development Like other countries in South Asia, Bangladesh is in the early stages of urbanization, with less than 1 in 5 members of the population in urban areas. However, the high and rising density of population and the concentration of industrial development in the cities has contributed to a current 6-7% annual increase of urban population. With the increasing incidence of landlessness and poverty in rural areas, rural-to-urban migration can be expected to continue. Even if he present rapid rate of urban growth slows to less than 5Z over the next 15 years, the total urban population will reach million by the year 2000, adding about 20 million to the present urban population Urbanization will, therefore, have important implications for all sectors of the economy, confirming the need for a clearly articulated urban development policy. The issue is not whether urbanization could or should be slowed down, but how to develop urban areas more efiiciently so that they can contribute more effectively to economic growth and social development. Similarly, it is not an issue whether urban growth should take place in smaller or larger cities. Given the present dominance of the three largest centers, a quite explosive rate of growth of the small centers would be required to make much of a difference in the rates of growth of Dhaka, Chittagong and Khulna. The important objective of policy should, therefore, be to plan for an orderly growth of all urban centers rather than attempting to restrict artificially the growth of the largest cities The expected growth of urban population will require a massive effort to provide additional land, infrastructure and shelter as well as to extend and improve the existing levels of municipal services and facilities. The scale and complexity of managing the process of urbanization will be further increased by the presently deteriorating condition of urban infrastructure and shelter. At present, about two-thirds of the urban population is inadequately serviced and the majority live in very low standard rental and squatter accommodation. These standards will deteriorate further under the growing pressure of urban population unless policies are reoriented to meet essential needs through developing appropriate design standards, improving the efficiency of resource use as well as the capacity for local resource mobilization Provision and servicing of land: The area of cities will have to expard substantially in the coming years in line with the growing need for accomaodation and commercial activity. At the same time, the conversion of land to urban use is unusually difficult in Bangladesh: land suitable for development is extremely scarce since a high proportion of such land is liable to flooding, requiring substantial resources for reclamation and flood control. The Government does not own much of the required land and because of intense speculation the prices of suitable land have risen much faster than general domestic inflation. Private land developers are meeting some of the demand of higher income groups, but high land prices have pushed low-

55 -41- income groups out of the formal land market into illegal developments and squatter settlements. Based on the experience of urbanization throughout Asia, the appropriate role for the public sector should be to concentrate on the provision of land and basic infrastructure, especially for low-income groups. Cost-effective land development with affordable design standards focusing on the provision of serviced plots could serve the low-income population at 10-15Z of the cost of the existing, highly subsidized conventional housing programs which benefit the relatively better-off At the same time that the conditions of much of the urban population are extremely depressed, the capital and rental value of land and other urban property is rising rapidly. Such gains are a:cruing largely to a very small minority of the population. It would, therefore, be reasonable to expect that capital gains and rising rental incomes should be taxed in order to help defray the high capital cost of further urban infrastructure development, acknowledging that these gains were made possible by past public investment in such infrastructure. Assessing and levying taxes on urban property will be paliticallw difficult, but would certainly not be impossible to administer through a properly maintained system of records of urban property ownership Urban services: Delays in the provision of public infrastructure services (including water supply, sanitation, roads and storm drainage) are limiting the availability of land to accommodate urban growth. In many cases, these delays are due to inappropriate regulations on site layouts and construction; unnecessarily high standards have also led to continuing largescale public subsidies to make piped waterborne sewerage available to upper and middle-income beneficiaries while pushing the cost of public sanitation further bey.zd the means of lower-income groups. The public sector, by itself, is not likely to be able to make a significant impact on municipal services and housing problems. In Dhaka, because of excessively high standards and the high price of land, total formal sector housing provided is meeting only 5Z of the annual need. In these circumstances, it would be essential for the private sector to take on an increasing role in the provi- Sion of urban shelter and services, within a realistic framework of regulations. Attention will also need to be given to the financing of those services which can only be provided by the public sector At the present, only the better-off members of the urban population benefit from most urban services. If these services are to be spread further, then the agencies providing them will need to ensure that standards are not unduly high and a greater share of the costs of operation and maintenance are borne by the beneficiaries. To some extent, the high degree of subsidization involved in the provision of housing and sanitation has been justified by the extremely low salaries of the civil servants receiving these services. There may, therefore, be a case for reducing subsidies while offsetting the burden, in some part, by salary adjustments. Such adjustments would have the beneficiaries in approximately the same financial position, but would be extremely important in strengthening the finances of the agencies providing urban services. The additional salary cost to the budget

56 -42- could be offset by the reduced need for contributions from the budget to support these agencies. Human Resources The rapid growth of population has also hindered GOB's efforts to provide even the most basic education to the bulk of its population. The average rate of literacy is barely above 25!, with only 33Z of males and 131 of females considered literate. There is considerabl evidence that investments in human capital, particularly at the lowest levels, can make a significant contribution to agricultural output, labor productivity and to reduced fertility rates. The expansion of basic education and training opportunities in Bangiadesh is, therefore, not just a basic social requirement but should be an integral part of the nation's economic development strategy. In contrast to these ne^ds, only 541 the eligible population is presently reached by the education system, although 5 million children are expected to be added to the primary school age population over the next 15 years. An increased coverage of services and improvements in quality will be accomplished only through a more efficient utilization of resources, recovery of a higher proportion of costs from beneficiaries of higher education as well as looking to local communities to share more of the costs of providing education services at the primary school level. Even with such policy changes, large segments of the rural population will not have access to the formal education system for some time to come. Non-formal education linked to the promotion of literacy and other essential skills for self-employment should, therefore, also be featured as part of GOB's education strategy for the coming decades Primary education: Recognizing the limitations on the expansion of the primary education system, GOB has scaled down its earlier objective of achieving universal primary education by It is now expected that about 65Z of the eligible age group could be enrolled in primary schools by 1990, with the percentage rising to 74% or as high as 89% by 2000, depending on the assumptions made regarding the decline in fertility during the intervening years. The financial implications of the implied enrollmenc targets would, in any case, be significant In addition to financing an expansion of the system, attention will also need to be paid to improving the quality and effectiveness of primary education. The majority of primary schools are of low quality construction, with inadequate supplies of textbooks and other materials. Teacher to student ratios are high at 1:70 to 1:100 in the initial years of primary school and many teachers take part-time jobs to supplement their low incomes, leading to frequent absences from school. The teachers have only minimal training and instruction is dominated by rote-learning in preparation for examination. In these circumstances, it is not easy to convince parents that the benefits of learning outweigh the economic cost of sending their children to school in terms of the labor foregone. As a result, by the end of Grade V teacher:student ratios decline to 1:12 as parents withdraw their children

57 -43- from school. Such high dropout rates mean that little permanent benefit is gained by most of the children enrolled so that much of the massive financial investment in schools and teachers is wasted Improving the internal efficiency of the present primary school system will require some policy reforms to remove the existing disincentives to enrolling children and to reduce dropout and repetition rates. One policy option might be the introduction of flexible scheduling of school hours and calendars to reflect local planting and harvesting patterns. It will also be important to reduce the numbers repeating early grades since these students swell class sizes at the lower grades and usually drop out at the later stages of primary school. Improvements are also desirable in the training of primary school teachers as well as their utilization and career development, together with a more adequate provision of teaching materials. Resource mobilization will also be needed: the provision of free and full access to primary education will be beyond COB's reach for some time to come: improving the coverage of primary education while improving its quality will be possible only if local communities are enabled and persuaded to share in the costs of this effort Basic skills training: GOB operates over 50 Vocational Training Institutes and seven Technical Training Centers for training semi-skilled workers and artisans such as carpenters and mechanics. Although these programs are relevant to the needs of rural areas, they are beyond the reach of the bulk of the population, particularly the landless poor, since five to eight years of schooling are required for admission. In addition, some of the foreign and local non-government organizations (NcOs) working in Bangladesh are involved in the provision of basic skills training: it is estimated that about 500,000 rural families are reached by these NGOs. The approach of the more successful NGOs has been to conduct functional education with a focus on literacy; to form groups around productive activities; to conduct training in necessary skills and to extend credit to allow them to become involved in income generating projects. The proposed approach to the accelerated promotion of rural self-employment discussed above is based on the experience of such NGOs Literacy: A number of initiatives have been launched in the past to make a major improvement in the extent of literacy. The Second Five Year Plan aimed to extend literacy to all of the 40 million people in the age group. Nearly one million people were enrolled during 1980, but the momentum of the program was not sustained. The program was revived in 1984, with a more modest objective to make 24 million people in the age group literate by The program is to be managed at the Upazila level, by a committee chaired by the Upazila Nirbabi Officer. While teaching materials are to be supplied by the central government, half of the recurrent expenditures are to be born by the Upazilas themselves. Although the target for 1990 is likely to prove overly ambitious, it should be possible to make significant headway, provided that the literacy to be imparted is perceived to be useful to the lives of the rural population.

58 Higher education: On balance, it would seem appropriate for GOB to continue its strategy of shifting expenditure allocations for education in favor of more basic education and training, while taking steps to improve the quality and relevance of higher education. Particular attention siiould be paid to technical education, which will require improvements in the training of instructors. Such training should provide instructors with practical experience as well as pedagogic training. CurricuLa should be adapted to be more practical and closely related to advances in technology and the future needs of industry, commerce and government. Periods of practical experience should be integrated into programs of training, while the supply of teaching materials will also need to be enhanced Post primary education facilities located in urban areas re presently heavily subsidized and accessible mostly to the urban elite. Since the majority of students are drawn from this group, there should be considerable scope for levying higher fees more closely reflecting the costs of higher education. At the same time, provision could be made for education loans for students from leas well-off families. Health Health conditions: The present health status of the population of Bangladesh is adversely affected by the inadequate nutrition of most of the population which is, in turn, a symptom of serious poverty due to the lack of productive opportunities for income generation. The crude death rate is estimated at 16 per 1,000 with a life expectancy of approximately 55 years. Leading causes of death include respiratory disease, tuberculosis, malaria and dysentery. The greatest proportion of deaths is during the first few years, with an estimated infant mortality ratio of over 120 per 1,000 live births. Largely due to nutritional deficiencies, child mortality is estimated at 23 per 1,000 population aged 1-4 years, while maternal mortality is estimated at 6 deaths per 1,000 live births In the first months of life, 60% of deaths are due to tetanus; in the subsequent months 27% of deaths are due to diarrheal disease, 26% to respiratory disease and 24% to tetanus. In the second year, 46Z of deaths are due to diarrheal disease which also accounts for 63% of deaths in the 2-4 year age group. Parasitic infestation from hookworm and roundworm affects 80% of those under 15 years, contributing to anemia and malnutrition. The high maternal mortality rale is due to a range of conditions associated with unregulated reproduction, poor pre-natal care and unsafe birth practices In addition to its immense social cost, the poor health of the population also carries a considerable economic cost. The pervasiveness of anemia and malnutrition in adults has a direct adverse effect on their productivity. The health problems of children lead to unduly high rates of absenteeism and reduce the capacity for assimilating the information provided by formal education. High fertility rates, combined with inadequate care and

59 -45- nutrition, result in poor maternal health which contributes to high infant mortality which, in turn, reinforces the motivation for high fertility Substantial improvements of health conditions could be brought about by the increased coverage of the population with well known and well tested techniques for dealing with the limited number of main factors responsible for most childhood and maternal mortality. Accordingly, the objectives of GOB's health strategy for the next five years are designed to maximize the effectiveness of the health system and include the following: (a) to deliver antenatal and postnatal care to all pregnant mothers through health facilities serving a population of up to 2000; (b) to provide safe facilities for at least 30% of all deliveries in rural areas; (c) to immunize at least 30% of women in reproductive age groups against tetanus; (d) to promote the use of oral rehydration therapy for dealing with diarrhea; and (e) to immunize 55Z of urban and 30% of rural children up to 2 years of age with basic vaccines. If applied effectively, these measures could make it possible to reduce infant mortality to 100 per 1,000 live births, and to lower maternal mortality from 6 to 4 per 1,000 live births by Longer term improvements in health conditions will require broader, less direct measures. Safe water supply will need to be improved from its present level of one tubewell per 160 persons in rural areas and domestic latrine construction from the present level of 1% of households. The most important contribution towards improving the health status of the community would, however, be the improvement of nutrition levels made possible by increased opportunities for income earning to provide the purchasing power for more adequate diets Health services: The objectives of the Second Five Year Plan have been to shift the emphasis of health care from curative towards preventive health care. The delivery of health services have been shifted progressively from large urban institutions to Upazila and Union level facilities to improve the access to these services of the poorer and more isolated sections of the population. Over 300 Upazila health complexes and approximately 1,000 Union level health and family welfare centers have been set up. These smaller centers are presently generally fully staffed by paramedical staff (medical assistant and family welfare visitors) At present, there is considerably under-employment of medical doctors in Bangladesh. The output 'rom medical colleges has been boosted, but there are fewer opportunities for emigration and a general reluctance to accept work in rural areas. In response to this situation, consideration has been given to the assignment of Government doctors to Union health and welfare centers, thereby upgrading the present paramedical staff. Such deployment of medical officers, as prescetly trained and educated, could create some problems. It is questionable whether such high-level skills can be efficiently used at this level and, given the higher costs of doctors, it may not be possible to expand such a standard of service to cover the whole population even by the end of this century. To reduce the additional cost, it has been proposed that these doctors (MOs) should be provided with facilities for private practice to supplement their salaries. There is a risk that the time

60 -46- of the MOs as well as the use of the staff and supplies of the Union health centers may be unduly diverted towards private practice. An alternative approach would be to encourage doctors to practice primarily in the private sector in rural areas and to pay them a fee for items of service to the public health centers through referrals. Such an approach would make the activities of the doctors additive to existing services, rather than displacing them The current availability of medical supplies (drugs, vaccines and biological supplies) is grossly inadequate, representing a serious constraint on the efficient use of existing expensive facilities and trained manpower. As in many other sectors, there is a need for better balance between capital and recurrent expenditures. A policy of partial cost recovery for drugs and services could help provide the resources for a more effective health delivery system. In the absence of some cost recovery, it is doubtful whether an adequate supply of drugs and other medical supplies can be maintained in view of the limited resources available to the health sector. Choices for the future To sum up, the Government of Bangladesh faces an enormous challenge in terms of providing adequate urban infrastructure as well as health and education services to the increasing population. In each of these sectors, it will be necessary to face up to the difficult, but unavoidable trade-offs which need to be made between: - the standards at which these services are to be provided; - the proportion of the eligible population to be reached by these services; and - the degree of subsidization of these services. it is not easy to accept that the standards of services to be provided to the people of Bangladesh may need to be set lower than those already available in many other countries in the developing world. However, standards which are too high in comparison with the resource base will not be possible to replicate throughout Bangladesh - in most cases only the relatively better off minority of the population has access to even the most basic public utilities and social services at the present time. Nor is it easy to contemplate that the poorest sections of the population should be asked to make a greater contribution to the provision of services. However, much of the population who have yet to benefit from even the most basic services may remain beyond reach if existing and potential beneficiaries are either not willing to, or prevented from being able to share in the cost of providing services of a realistic standard. Policies which rule out cost recovery for services which are regarded as basic needs or rights in most countries may, inadvertently, restrict the access to these services to a relatively privileged minority within a very poor population for many years to come.

61 -47- F. POLICY RECOMMENDATIONS For the convenience of readers, the major policy recommendations contained in the report are summarized briefly, with cross-references to relevant paragraphs of the report. Given the coverage of the report, the recommendations cover a wide range of issues. They can, however, be grouped broadly into three categories: (1) Short-term management: There is a clear need for consistent and prudent management of short-term macro-economic conditions, with particular emphasis on improved monetary policy and continued attention to the maintenance of adequate foodgrain security stocks. (2) Medium-term prospects: The forthcoming Third Five Year Plan should be based on a realistic assessment of the limited resource prospects for the rest of the 1980s. Continued external assistance will need to be matched by improved GOB efforts in terms of project implementation and domestic resource mobilization. (3) Long-term development: The prospects for progress towards alleviation of poverty in Bangladesh depend crucially on the ability of Bangladesh to reduce the rate of growth of population. Even under the most optimistic assumptions regarding the future decline of fertility rates, the extension of even the basic public services to the bulk of the population will require the acceptance of modest standards and a higher degree of cost-sharing by beneficiaries. The following recommendations elaborate these three basic themes Macro-economic management: (a) Monetary policy (paras to 2.15): During 1985, the growth of the money supply should be held to well below the recent excessive rates, while avoiding a serious setback to domestic economic growth. Policy instruments including interest rate adjustments, restrictions on central bank refinancing and selective credit ceilings will need to be used in careful combination to avoid a sharp acceleration in domestic inflation or excessive demand for imports. If there is an increase in the rate of inflation, it will be important to make prompt and at least corresponding adjustments in the administered prices of a number of important conmodities in order to make further gradual progress towards the reduction of price distortions and subsidies.

62 -48- (b) Balance of payments management (paras to 2.30): Following the recent deterioration in the balance of payments, the authorities will need to exercise careful balance of payments and flexible erchange rate management in order to avoid the need for undue reliance on quantitative restrictions of imports which could undermine the recent recovery of non-agricultural production. (c) Public finance (paras to 2.51): The estimated resources and ADP expenditures for FY84 and FY85 both exceeded the actual availability of resources as well as the capacity for project implementation. For future years it would be desirable to set more realistic targets, based on detailed medium-term projections of both domestic and external resources; this will require an improved capacity for monitoring and forecasting the pace of project implementation Agriculture and Foodgrain Policies: (a) Foodgrain stocks (paras to 3.20): The 1984 flood crisis has once again highlighted the need for keeping adequate amounts of appropriately dispersed foodgrain stocks in Bangladesh. A target of 1.25 million tons of foodgrains at the end of each financial year should be regarded as a minimum objective and additional food aid during FY86 is warranted to assist in the rebuilding of foodgrain stocks. (b) Public Food Distribution System (Chapter 4): Although foodgrain distribution through relief operations rose sharply in FY84, distribution through the ration system (including modified rationing) accounted for more than half of total offtake from the Public Food Distribution System. The subsidy element of ration sales further increased the offtake from the ration system. This experience underlines the desirability of gradually reducing the subsidy element and the scope of the ration system in order to allow a progressive reorientation of the Public Food Distribution System towards open market price stabilization and the protection of the nutrition standards of the most vulnerable groups of the population through programs such as Food-for-Work. (c) Agricultural inputs (paras 3.21 to 3.30): Fertilizer offtake rose significantly during 1984 despite the shortage of supplies which drove retail prices well above the subsidized wholesale prices. This experience indicates the need for more effective monitoring and management of fertilizer supplies as well as the scope for gradual elimination of the subsidy element of officially determined fertilizer wholesale prices. Agricultural credit disbursements increased sharply, once again, in FY84, but

63 -49- such increases will not be sustainable unless serious action is taken to improve the rate of recovery of outstanding credit Industry: GOB has initiated a substantial program of reforms under its 1982 New Industrial Policy. Outstanding issues for consideration include the following: (a) Public sector (paras to 5.32): Following the sale of a large number of public sector units, progress should also be made towards clarifying the corporate objectives and investment criteria for the retained units, backed by an efficient system for monitoring the performance of public industrial enterprises. (b) Private sector (paras to 5.48): In order to promote private industrial investment along economically efficient lines, without the need for elaborate systems of regulation, it will be necessary to rationalize the system of tariffs and other incentives facing industry, with particular emphasis on reducing any bias against export-oriented activities. (c) Development Finance Institutions (paras to 5.51): Any successful industrial strategy-will require a thorough reform of the existing development finance institutions whose financial strength has been undermined by their inability to collect outstanding debts. Sustained and effective actions need to be taken to change an environment in which debts are not expected to be repaid, followed by a strengthening of the appraisal and management capacity of lending institutions Development Administration: (a) Public service renumeration (paras to 6.07): GOB has begun to address the crucial issue of providing adequate and appropriate compensation for its civil servants. In addition to the levels of salaries, attention needs to be paid to appropriate differentials in compenseuion at varying levels and the composition of compensation between salaries, perquisites and (explicit or implicit) subsidies. (b) Decentralization (paras to 6.24): Key issues to be addressed in order to increase the effectiveness of Upazila level administration include: (i) improving the training and strengthening the effective role of Upazila Nirbahi Officers; (ii) providing effective incentives for resource mobilization by the Upazilas;

64 -50- (c) Project implementation (paras to 6.27): Although a large number of reforms have been implemented, project implementation has lagged well behind expectations. Further determined investigation is needed to identify and remove bottlenecks in the decision-making process Issues for the Third Five Year Plan: Considerable work remains to be done to finalize a Plan consistent with national goals as well as with available resources. Present indications are that foreign exchange and budgetary resources will both be very tightly constrained, especially during the first two years of the next Plan period. In these circumstances, it would be appropriate to emphasize the need for consolidation to ensure the completion of ongoing projects and to allocate adequate resources for the effective operation and maintenance of past investments. (a) Balance of payments prospects (paras to 7.32): The macroeconomic framework of the 3FYP will need to take into account the likel- limits on the capacity for financing imports. Expectations for growth, savings and investments should be commensurate with the expected constraints on foreign exchange and imports. Special balance of payments support is likely to be required to help ease the extremely difficult balance of payments outlook forecast for PY86 and FY87. (b) Resource mobilization (paras to 7.47): An improved domestic resource mobilization effort will be required to permit even a modest real increase in public expenditures over the plan period. It should be possible to augment resources through a combination of: = increased cost recovery for government services; = increasing the proportion of public sector investments financed from internal cash generation; - improving the profitability of public industrial enterprises; and reducing subsidies (e.g., on foodgrain rations and fertilizers). As discussed in paragraph 7.47, a particularly strong domestic resource mobilization effort (in the order of 1% of GDP) will be needed to avoid a real decline in resources for ADP expenditures in FY86. (c) Operation and maintenance (paras to 7.52): During the next five years it would be appropriate to plan for a substantial increase in O&M expenditures relative to the growth of ADP

65 -51- expenditures. This would reverse the past trends when recurrent expenditures were unduly squeezed in order to allow a relatively more rapid growth of the ADP. (d) Medium-term expenditure planning (para. 7.55): Since almost all resources for the initial years of the 3FYP are effectively pre-empted by the need to complete projects already underway and there is an increasing degree of uncertainty concerning the resources likely to be available by the end of the plan period, it would seem appropriate to adopt a rolling two to three-year time horizon for effective decision making regarding new project starts. (e) Allocation of investments (paras to 7.57): Within the expected limits of resources for ADP financing and of implementation capacity, priority will have to be given to the completion of ongoing projects and the complementary activities needed to derive the expected benefits from existing investments. The limited scope for new investments underlines the need for careful project selection. Very careful deliberations will be needed before commitments are made to large indivisible investments such as a multi-purpose crossing of the Jamuna River Population growth and development: Turning to longer-term issues, there are two fundamentally important recommendations: (a) Population program (Chapter 9): Even on the basis of highly optimistic assumptions regarding the future rate of fertility decline, the population of Bangladesh is projected to increase by over 60% during the next 30 years. In these circumstances, GOB should continue to give effective financial, organizational and political support to its population program. (b) Social services (para. 8.09): In order to reach an increasing proportion of its population with even the most basic social services, GOB will need to face up to the need to make tradeoffs between the objectives of improving the quality of services, extending wider access to these services and the degree of (explicit or implicit) subsidies involved in their provision. This report recou.ajends that modest standards be set and subsidies limited or reduced in order to allow a higher proportion of the population to have access to basic services Poverty and employment generation: Even if very optimistic assumptions are made concerning increased agricultural activity, no more than 25% of the expected growth in labor force can be absorbed productively by the agricultural sector. Development strategies for Bangladesh will, therefore,

66 -52- also need to emphasize the promotion of productive non-agricultural employment in both rural and urban areas in order to avoid an increasing degree of poverty due to underemployment. (a) Food-for-Work and Relief Programs (paras to 10.39): There may be further scope for the expansion of Food-for-Work and other relief programs which are designed to provide employment through the provision of resources for the construction of infrastructure using labor-intensive methods. However, the growth of these programs could become constrained by administrative capacity as well as by the limits on available budgetary resources: unless the flow of food aid to Bangladesh can be maintained over time, significant growth of such programs will not be affordable. (b) Rural self-employment (paras to 10.47): The experience gained from a number of recent initiatives to promote rural self-employment by some NGOs as well as by the Bangladesh Rural Development Board could provide the basis for a new iniciative for employment generation at the Upazila level. Such an initiative should combine efforts aimed at group formation, literacy and skills training, credit, market information and access to target groups of rural landless in order to generate new economic activities Urban development: (a) Provision and servicing of urban land (paras to 11.15): The expected rapid growth or urban areas will require the provision of significant land areas in line with the growing need for accommodation and commercial activity. Based on the experience of urbanization throughout Asia, the appropriate role for the public sector should be to concentrate on the provision of land and basic infrastructure, especially for low-income groups. (b) Municipal finances (paras and 11.21): If services, such as water and sanitation, are to reach beyond the better-off members of the urban population, the agencies providing them will need to ensure that standards are not unduly high and a greater share of the costs of operation and maintenance are borne by beneficiaries. In addition to such cost recovery efforts, municipal finances could be strengthened by the taxation of capital gains and increasing rental incomes accruing to urban property owners Human resources: In contrast to the vast needs for training and education, only a small proportion of the population is presently reached by the education system. An increased coverage of services and improvements in quality can be accomplished only through a more efficient utilization of