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Economic and Political Review of Selected Asian Countries

Vietnam Cambodia Japan
Bangladesh Thailand Indonesia
Gold - was lenin right? PhilippinesSingapore
Inside Asia ReportChina - US Relations Enter A New EraAsian Growth Prospects

Prepared for "Asia and Pacific Review 2001"

Political developments
Since the last military government returned to the barracks in 1991, Bangladesh has been ruled intermittently by two ruling parties, the Bangladesh National Party (BNP) from 1991-96 and since 1996 by the Awami League. The next election must be held by September 2001. All of 2000 has been, in effect, positioning by both parties for that event.

The election process in Bangladesh is unique in that for the three months of an election campaign the country must be governed by a non-political caretaker administration, which will take office, temporarily by no later than July 2001.

The leaders of the two main parties are women related to the countries first two Presidents, both of whom were murdered in office. The Prime Minister Sheik Hasina Wajid is the daughter of the country's first President. The BNP is led by Begum Khaleda Zia, the widow of the second president. They despise each other vehemently and this adversely affects the governance of the country. Policy takes a back seat to personality and the evening of scores much of the time.

The proximity of the election led to a deterioration of conditions throughout 2000 as the two parties jockeyed for advantage mobilising their supporters into the streets. The BNP-led opposition held a general strike in October to protest the killing of one of its members. This followed another strike in September led by the students and earlier random bombings for which the Islamic Jamal-e-Islami party was blamed.

The violence has continued to build since then. Another general strike was held in February 2001 resulting in several deaths. The BNP opposition party, out of desperation, now appears to making common cause with various Islamic parties. This could be the beginning of a radicalisation in Bangladesh politics, which until now could be characterised as secular, even if the country is almost completely Moslem. It is a trend that must be watched closely since there have been strong indications that local Islamic organisations have been infiltrated by militant Pakistani and Afghan elements.

Election outlook
The election outcome will be largely dependent on whom the electorate blames: blame the Government for failing to deliver on its pledges, or; the BNP for leading the strikes that have upset the business community. A complicating factor would be a potential split in the opposition if the former military ruler Gen. Ershad - now free from jail - were able to run as a potential Prime Minister. (he is presently banned by an Appellate Court ruling.)

However, in the aftermath of the election there could be a brief period when policy reforms are pushed through before the cycle of obstruction and inertia build once again. If the country is to rebuild the momentum it developed in the 1991-94 period, however, it is essential that any post election quiet period be used constructively.

There are increasing concerns, however, that the Awami League may not be willing to hand over power peacefully. The potential for considerable political instability over the coming year is clearly growing.

International relations
On the foreign policy front, the Awami League is more friendly towards India whilst the BNP is warier towards India and leans towards Pakistan. Looking forward, the key issue is the future content of Islam in the country's politics, since that will obviously affect international relations greatly.

The country has been unable to arrive at a consensus on how to exploit its most valuable resource: its natural gas because the BNP is so opposed to selling "the country's birthright" to an energy hungry India. But resolving that issue is fundamental to whether Bangladesh will move forward.

India is now sufficiently concerned about developments in Bangladesh that it announced, in early 2001, it intends to build a wire fence along the whole of the Indo-Bangladesh border by 2005. This would be aimed partly at reducing the inflow of illegal immigrants but primarily at reducing the ethnic insurgents moving into Indian tribal areas. They are also concerned about Bangladesh support for Kashmiri dissidents.

Economic developments
Powered by good harvests, the economic growth rate picked up to 5.5 percent in 2000 from the previous flood ravaged year's rate 4.9 percent rate. For probably the first time since independence in 1971 the country reached self-sufficiency in rice, the staple food. Self sufficiency in rice, whilst hardly an optimal theoretical economic policy is, nevertheless, deemed important in a country with Bangladesh's poverty characteristics and burgeoning population, now estimated to be 130 million. It is important in allowing the country to escape from a mendicant status dependent on official food aid.

The agriculture sector grew by 6.4 percent in 2000 compared with 4.8 percent the previous year. The industrial sector grew by 5.6 percent, which was below the average 8 percent growth of the previous five years. The lower industrial growth trend reflected the growing infrastructure constraints, particularly for power, as well as weaknesses in the credit and capital markets.

Exports, especially in ready-made garments, grew by a satisfying 8.2 percent recovering from the flood damaged 2.9 percent rate in 1999. Since import growth was contained at 4.8 percent and there was a strong growth in workers' remittances, the current account deficit was a manageable 1 percent of GDP, an improvement on the previous year's deficit of 1.4 percent GDP.

Despite this improvement in the current account situation, the foreign exchange reserves remained stagnant at USD 1.6 billion, which only represents 2.3 months of imports. It appears likely that political uncertainties, and doubts about the value of the currency, the Taka, are fostering leads and lags in repatriation of proceeds, if not outright capital flight. Whilst the currency was devalued in August 2000 by 6 percent to maintain a level of competitiveness, this may not have been sufficient, given the growth in the money supply.

During 2000, the money supply grew by almost 19 percent, well in excess of the trend level of 10-12 percent. This was driven by the Government's resort to financing the increasing budget deficit (6.1 percent of GDP in 2000 compared with 4.8 percent previously) through the banking system. Government borrowing from the banking system rose by 31 percent with more than half of that borrowed by the central bank, the most inflationary form of finance.

The Government's inability to match revenues with expenditures increased further as the latter expanded to 15 percent of GDP whilst revenues amounted to a relatively poor 8.7 percent. Losses of state owned enterprises of over a percent of GDP, that also had to be financed, are in addition to these figures.

Inflation, as officially measured, showed an improvement at 3.8 percent (compared with 9 percent in 1999) reflecting improved rice availability. But, as in many countries, these figures are very narrowly defined and subject to official massaging, and almost certainly do not reflect wider cost pressures within the economy. Nor, do they reflect the feedback from either the August devaluation or the resort to inflationary finance in 2000.

Economic outlook for 2001
Growth should be maintained around the same 5.5 percent level in 2001. As always in Bangladesh, the outcome will be dependent on the weather and the extent of any flooding. The slowdown in the United States can also be expected to affect exports to some degree. However, the vigour of the Indian economy is also extremely important and the March 2001 Indian budget is very pro-growth and therefore also positive for Bangladesh's prospects.

With pre-election spending underway for the almost 9 months of the year, the fiscal deficit is likely to worsen rather than improve since no new effective revenue measures can be expected during this time. Resort to inflationary finance can be expected again. With this prospect the current account deficit is expected to worsen slightly, the money supply continue to expand in the high teens with resultant pressure on costs and eventually the Taka.

Gross savings are around 21.5 percent and investment about a percent higher. Given the poor revenue capability, the Government is still very dependent on foreign assistance for about 10 percent of GDP along with overseas remittances. Maintaining the confidence of both these classes is essential to the country's macroeconomic stability.

Once the elections are out of the way, then a more responsible budgetary policy and a renewed commitment to economic reform will be essential from the new Government and expected by the international donor community.

Medium term policy issues
The liberalisations of the early 1990s successfully raised Bangladesh's economic growth rate but a renewed effort on the policy front is required if the government is to raise the rate closer to the 6-8 percent that India looks like achieving in the 200-4 period. Only a higher growth rate will provide the Government with the resources needed to attack the country's endemic poverty concerns.

There is a new urgency to reform since, without reform, the country risks having its foreign aid allotments reduced by weary donors. Given the country's dependency on aid to fund half its investment program, the country could indeed slip back. The process of reallocating aid from Bangladesh to countries seen to be making better use of the funds has been underway for a couple of years. Major donors reduced their aid in 1999-2000 to USD 1.48 billion from the USD 2.64 billion.

Their frustrations are aimed at the Government's seeming inability to make progress on domestic resource mobilisation, specifically more effective tax collection, SOE privatisation and banking sector reform, whilst tolerating considerable corruption.

A more diversified export base is also important since growth in the country's main export garments are threatened by the ending of the Multifibre Agreement in 2004. The country has the opportunity to diversify if it decides to export natural gas. As noted earlier, nationalistic feelings towards this natural resource have prevented its export. However, under US pressure that could change after the election and Bangladesh has the potential to become one of the top 15 natural gas exporters in the world.

This decision would have major significance for Bangladesh. Gas export revenues could take over from foreign aid as the main source of government finance. This, in turn, would change its relations with its neighbours and aid donors providing it with international respect.

Besides India, China is the most likely customer. The US oil giant Unocal is keen to get access. India will likely become the primary customer if the politics alllows. But Bangladesh will want to play a cautious game and not become too dependent on any one country or market.

Stock Market:
There are small long-established stock exchanges in Dhaka and Chittagong. However, their size and lack of liquidity means that the foreign interest is minimal. The primary vehicle for overseas investors has been through offshore funds, the largest of which, the Bangladesh Fund, managed by Indocam Asia, has distributed most of its assets of its shareholders. The market is extremely small with about 200 issues that are mostly illiquid.

There is certainly both potential and need for the market to grow. The growing hole in the Government's budget and the need for finance would indicate a need for accelerated privatisation of the remaining SOEs and the restructuring the state owned banks. The markets could be used as a greater source of infrastructure finance and there is a possibility, however slight, of natural gas and energy issues after the elections. It will require such moves to energise the markets and renew foreign interest.

Bangladesh has made real and definite progress in raising living standards since liberalisation began a decade ago after the departure of the last military Government. The coming post election period will show whether the new Government - whichever party wins - is prepared to build on the progress to-date and move more aggressively on a growing backlog of problems, including corruption which has been on an increase at all levels of society. If they do not, then there are obvious dangers to the longer-term macroeconomic and political stability of the country from the young, who are increasingly listening to the call from the mosques. This threat should be enough to persuade the Government to exploit fully the gas reserves, finally.

Country Risk
There has been some deterioration in the internal stability of Bangladesh in the most recent past. The problem is a leadership of the two main political parties determined to settle old personal scores at the expense of effective leadership to address the country's underlying problems. Whilst on the other hand, the country can now feed itself and growth continues despite the unrest on the streets, the country needs higher growth and is not realising anything like its full potential. New leadership is needed.

The growing Islamicisation of Bangladesh is a worrying trend since it raises tensions on the Indian sub-continent, which is the only area of the world where two nuclear powers (India and Pakistan) share a common (disputed) boundary. India has increasing concerns about Bangladesh, witness its decision to fence off the complete boundary between the two.
Regional Stability:poor
Stock Market:illiquid and speculative

William R. Thomson                               7 March 2001
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