Bangladeshww Development Update Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized October 2016 BANGLADESH DEVELOPMENT UPDATE Sustained Development Progress October 2016 The World Bank Office, Dhaka Plot E-32, Agargaon Sher-e-Bangla Nagar Dhaka – 1207, Bangladesh Tel.: (880-2) 5566-7777 Fax: (880-2) 5566-7778 www.worldbank.org/bd Standard Disclaimer: This volume is a product of the staff of the International Bank for Reconstruction and Development/ The World Bank. The findings, interpretations, and conclusions expressed in this paper do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Copyright Statement: The material in this publication is copyrighted. Copying and/or transmitting ions or all of this work without permission may be a violation of applicable law. The International Bank for Reconstruction and Development/The World Bank encourages dissemination of its work and will normally grant permission to reproduce portions of the work promptly. For permission to photocopy or reprint any part of this work, please send a request with complete information to the Copyright Clearance Center, Inc., 222 Rosewood Drive, Danvers, MA 01923, USA, telephone 978-750-8400, fax 978-750-4470, http://www.copyright.com/. All other queries on rights and licenses, including subsidiary rights, should be addressed to the Office of the Publisher, The World Bank, 1818 H Street NW, Washington, DC 20433, USA, fax 202-522-2422, e-mail [email protected]. Photo Credits: Cover: ©The World Bank, 2016 Printed in Bangladesh Sustained Development Progress Bangladesh Development Update Preface The objective of this report is to update the Government of Bangladesh, think tanks and researchers, the general public as well as the Bank’s senior management on the state of the economy, outlook, risks, progress on structural policy reforms and key challenges the economy is currently facing. The coverage includes developments in the real sector focusing on growth, inflation, and poverty; external sector developments focusing on the balance of payments, foreign exchange reserves and the exchange rate; fiscal developments focusing on revenue mobilization, public expenditures, and deficit financing; financial sector developments focusing on credit and interest rates; and monetary developments focusing on reserve money and broad money growth trends. This update also focuses on introducing carbon taxation in Bangladesh. This report was prepared by a team comprising of Zahid Hussain (Lead Economist), Simon Davies (Senior Economist), Sheikh Tanjeb Islam (Economist), Nobuo Yoshida (Senior Economist), Monica Yanez Pagans (Economist) and Afroza Alam (Research Analyst). Valuable contributions were made by Christain Eigen Zucci (Program Leader). Deepak K. Mishra (Lead Economist) provided extremely useful comments. Maura K. Leary (Senior Communications Officer) provided editorial support. Shubham Chaudhuri (Practice Manager) and Benu Bidani (Practice Manager) provided overall guidance in the preparation of this report. Mehar Akhter Khan (Program Assistant) and Subah Sabiha Mohona (Research Analyst) provided research support and formatted the document. Abbreviations and Acronyms ADB Asian Development Bank ICP International Comparison Program ADP Annual Development Plan ICT Information And Communications Technology BB Bangladesh Bank IMED Implementation Monitoring Evaluation Division BBS Bangladesh Bureau of Statistics INDC Intended Nationally Determined Contributions BERC Bangladesh Energy Regulatory Commission IPL International Poverty Line BHEL Bharat Heavy Electricals Limited ISO independent system operator BIFPCL Bangladesh-India Friendship Power Ltd. KSA Kingdom of Saudi Arabia Company BPC Bangladesh Petroleum Corporation LIBOR London Interbank Offered Rate BSTI Bangladesh Standards and Testing Institution LNG Liquefied Natural Gas CD Customs Duty LPG Liquefied Petroleum Gas CNG Compressed Natural Gas LPI Logistics Performance Index COP21 Conference of the Parties in Paris in 2015 LPL Lower Poverty Line DMRTD Dhaka Mass Rapid Transit Development MDGs Millennium Development Goals Project DNCC Dhaka North City Corporation MPS Monetary Policy Statement DSE Dhaka Stock Exchange MW Megawatts EBA Everything But Arms MH Million Hectares ECNEC Executive Committee of the National MMT Million Metric Tons Economic Council EEBL Excelerate Energy Bangladesh Limited MSTPP Moitri Super Thermal Power Project EMDEs Emerging Market Developing Economies MUSCCFPP MW Ultra-Super Critical Coal- Fired Power Project EPB Export Promotion Bureau MW Megawatts EU European Union NBR National Board of Revenue FAO Food and Agriculture Organization NDC Nationally Determined Contribution FBCCI Federation of Bangladesh Chamber of NER Nominal Exchange Rate Commerce and Industries FDI Foreign Direct Investment NPL Nonperforming Loan FY Fiscal Year NPR Nominal Protection Rate GBP British Pound PBRL Padma Bridge Rail Link GCC Gulf Cooperation Council GDP Gross Domestic Product GNI Gross National Income GSM Global System for Mobile communication Sustained Development Progress Bangladesh Development Update PD T-Bill Treasury bill Project Director PMB TFP Total Factor Productivity Padma Multipurpose Bridge PPF Project Preparatory Fund Tk Taka PPP Purchasing Power Parity TPP Trans-Pacific Partnership RD Regulatory Duty UAE United Arab Emirates RMG Ready-Made Garments UK United Kingdom RNPP Nuclear Power Plant USA United States of America ROA Return on Assets USD United States Dollar SCBs State Owned Commercial Banks USDA United States Department of Agriculture SD Supplementary Duty VAT Value Added Tax SDG Sustainable Development Goals WDI World Development Indicators SR Saudi Riyal WTO World Trade Organization Table of Contents EXECUTIVE SUMMARY ................................................................................................... IX A. TRENDS IN POVERTY AND SHARED PROSPERITY ................................................ 1 B. RECENT ECONOMIC DEVELOPMENTS .................................................................... 7 C. STRUCTURAL REFORMS ............................................................................................. 29 D. OUTLOOK ....................................................................................................................... 33 E. CHALLENGES AND POLICY RESPONSES ................................................................ 41 F. A CARBON TAX FOR BANGLADESH? ........................................................................ 47 ANNEX-1: .............................................................................................................................. 52 APPENDIX ............................................................................................................................ 53 LIST OF FIGURES Figure 1: Proportion of people living on less than $1.90 per day and population of the poor ........................... 2 Figure 2: Comparisons of poverty rates with other countries .................................................................................. 4 Figure 3: Private and Public Investment Growth Rates .......................................................................................... 12 Figure 4: Stock of FDI by Sector (end of December, 2015) .................................................................................. 12 Figure 5: Exports and RMG growth: .......................................................................................................................... 14 Figure 6: Remittance Growth ...................................................................................................................................... 15 Figure 7: Inflation .......................................................................................................................................................... 18 Figure 8: Rural and Urban Inflation ........................................................................................................................... 18 Figure 9: Current Account Balance ............................................................................................................................. 19 Figure 10: Real Effective Exchange Rate ................................................................................................................... 19 Figure 11: Lending & Deposit Rate ............................................................................................................................ 21 Figure 12: ADP Implementation ................................................................................................................................. 26 LIST OF TABLES Table 1: Comparison of poverty lines for 2010 in Bangladeshi taka and poverty rates ....................................... 3 Table 2: Growth Rate Needed to End Extreme Poverty .......................................................................................... 5 Table 3: GDP Growth ...................................................................................................................................................