Bangladesh: Development Issue 4

Bangladesh: Public Expenditure Management

Md. Matiur Rahman and Dr. Haripada Bhattacharjee*

BANGLADESH raised between 1972 and 2003 its dollar per capita income fourfold, reduced poverty by more than a third, increased life expectancy by more than 40%, and enhanced gross primary enrollment by over 80 per cent during the same period (World Bank, 2005). This remarkable progress is a testimony to the resilience and determination of a dynamic young nation and gives hope that with continued determined effort Bangladeshis can look forward to further gains in respect to development.

Notwithstanding past progress, Bangladesh is still amongst the poorest countries in the world with only $400 per capita income. It will take over 40 years of growth at this pace to reach the current per capita income level of Malaysia even though the recent per capita growth of Bangladesh rose from 3.7 per cent to 6.0 per cent. The World Bank estimated that Bangladesh could aspire to become a middle-income nation over the next 15-20 years if per capita growth rate rose by around 5.5 per cent. To achieve this, Bangladesh needs, among others, a sound public expenditure management.

Generally, economic management in Bangladesh has been sound over the last decade. Bangladesh achieved decent rates of growth, a steady reduction in poverty incidence, relatively low inflation, and a fairly stable domestic debt, interest, and exchange rates. Allocation of public expenditures of Bangladesh in broad categories -- such as interest payments, education, health, agriculture, transport, public order and safety, and others -- is much better than in India, Pakistan and Sri Lanka.

Each of these countries spends over 6.0 per cent of the GDP on interest payments. Defence spending in Bangladesh is also much low at 1.3 per cent of the GDP. India, Pakistan and Sri Lanka spend 2.4, 4.5 and 4.9 per cent respectively of their GDPs on defence (World Bank, 2005). The role of Bangladesh's defence forces in international peace keeping is a source of significant foreign exchange earning.

One notable feature in public expenditure of the government has been the shift of spending from agriculture and industries to the social sectors. Total expenditures on education, health, the social safety net and disaster management are currently about one third of total budgetary expenditures (see table 1). Outcomes in the social sectors have been good and much better than in the physical infrastructure areas.

Bangladesh's budgetary expenditures have not been characterised by high share of interest payment. Bangladesh has avoided excessive reliance on domestic and foreign borrowing, unlike its neighbours. Debt servicing has increased significantly, reflecting the increasing cost of domestic borrowing through nationalised commercial banks and foreign suppliers' credit. The GOB spends the equivalent of less than one per cent of the GDP on the safety net programmes.

However, the ratio of expenditures on safety net programmes as percentage of the GDP and public expenditures has been declining. While expenditure on social sectors has remained fairly constant since the mid-1990s -- in the range of 3.5 to 4.0 per cent annually, safety net expenditures now make up less than 20 per cent of all social sector expenditures, down from 30 per cent in the late 1990s -- indicating a crowding out of social assistance.

Safety net programmes roughly cover below 10 per cent of poor individuals and are administered by a large of number of agencies. Benefit incidence analysis of the safety net programmes reveals that these programmes are essentially the pro-poor. For example, Food for Work Programme created about 75,000,000 hours of works in rural areas, vulnerable group development programme assisted about 480,000 households by providing food to the poor, national nutrition programme helped significant reductions in poverty, improved in school enrolment, particularly of girls and in raising the marriage age (World Bank 2006).

Another study by the World Bank (2005) shows that the overall system of public expenditures on education and health are strongly pro-poor. For example, primary education (40 per cent of all current educational spending) is strongly pro-poor. The share of the poor people in all public health expenditures has been increasing and currently it is estimated to 45 per cent. The essential service package (ESP) allocations to "Child Health" are the most equitable and strongly pro-poor.

There are some weaknesses in Bangladesh's public expenditures programme. Low effectiveness of capital spending, inadequate attention to operations and maintenance, inappropriate employment and pay policies, and the existence of fairly large subsidiaries, etc., are the most important factors that affect sound economic management.

The weak expenditure management combined with other institutional weaknesses, has compromised the quality of public services. The most glaring examples of poor public service delivery are the deteriorating law and order situation; the high perception of corruption and citizen's dissatisfaction with services; and an inefficient bureaucracy that still maintains highly tight controls over critical business processes.

Moreover, the Annual Development Programme (ADP) includes many projects that are questionable. Questionable projects regularly find their way into the ADP mainly because of the weaknesses in the system of project management. For example, the ADP expenditures under Roads and Highways Department include about 800 sub-projects with annual ADP allocations of about 2.0 to 3.0 per cent of their project costs, implying that it would take 30 to 50 years to complete these projects (World Bank 2005).

Another area of weak public expenditure management is the large hidden subsidies and growing contingent liabilities, which are not reflected in the budget. Direct subsidy currently amount to less than 0.5 per cent of the GDP and is given on school textbooks, fertiliser distribution and several non-traditional export items. Indirect subsidy is estimated at 2.6 per cent of the GDP and is given on gas and electricity prices. Large contingent liabilities have accumulated on account of state-owned enterprises.

Despite all these weaknesses, public expenditure management in Bangladesh is broadly consistent with the government's economic and social development policy objectives. The successes in the social sector can be attributed to three factors: (i) the priority given by successive governments, (ii) strong support of various stakeholders in pursuing human development objectives, and (iii) an improved policy framework that enabled considerable innovation.

Recently government has taken efforts to prepare a medium-term expenditure framework. Experiences of other countries suggest that this can be a powerful tool to improve the effectiveness of public spendings provided projected activities well implemented.

>> Source: The Daily Financial Express, Bangladesh, July 20, 2006

* Md. Matiur Rahman is Director of Customs Intelligence and Investigation and Dr. Haripada Bhattacharjee is Professor of Department of Marketing, Dhaka University

International Banking

Bank size information

Top ten banking groups in the world ranked by tier 1 capital
Figures in U.S. dollars, and as at end-2004

1. Citigroup — 73 billion
2. JP Morgan Chase — 69 billion
3. HSBC — 67 billion
4. Bank of America — 64 billion
5. Credit Agricole Group — 63 billion
6. Royal Bank of Scotland — 43 billion
7. Mitsubishi Tokyo Financial Group — 40 billion
8. Mizuho Financial Group — 39 billion
9. HBOS — 36 billion
10. BNP Paribas — 35 billion

Top ten banking groups in the world ranked by assets
Figures in U.S. dollars, and as at end-2004

1. UBS — 1,533 billion
2. Citigroup — 1,484 billion
3. Mizuho Financial Group — 1,296 billion
4. HSBC Holdings — 1,277 billion
5. Crédit Agricole — 1,243 billion
6. BNP Paribas — 1,234 billion
7. JPMorgan Chase & Co. — 1,157 billion
8. Deutsche Bank — 1,144 billion
9. Royal Bank of Scotland — 1,119 billion
10. Bank of America — 1,110 billion

Top ten bank holding companies in the world ranked by profit
Figures in U.S. dollars, and as 2003

1. Citigroup — 21 billion
2. Bank of America — 15 billion
3. HSBC — 10 billion
4. Royal Bank of Scotland — 8 billion
5. Wells Fargo — 7 billion
6. JP Morgan Chase — 7 billion
7. UBS AG — 6 billion
8. Wachovia — 5 billion
9. Morgan Stanley — 5 billion
10. Merrill Lynch — 4 billion

Top ten bank holding companies in the U.S. ranked by assets
Figures as of March 31, 2006, in U.S. dollars

1. Citigroup Inc. — 1.586 trillion
2. Bank of America Corp. — 1.375 trillion
3. J.P. Morgan Chase & Co. — 1.273 trillion
4. Wachovia Corp. — 541 billion
5. Wells Fargo & Co. — 492 billion
6. HSBC North America Holdings Inc. — 441 billion
7. Taunus Corp. — 391 billion
8. U.S. Bancorp — 209 billion
9. SunTrust Banks, Inc. — 178 billion
10. Countrywide Financial Corp. — 177 billion

Top ten bank holding companies in the U.S. ranked by deposits
As of June 30, 2004 in U.S. dollars. These are U.S. deposits only. This is not a ranking of the largest U.S.-based global banks.

1. Bank of America Corp. — 526 billion
2. Wells Fargo & Co. — 256 billion
3. Wachovia Corp. — 238 billion
4. J.P. Morgan Chase & Co. — 227 billion (1)
5. Citigroup Inc. — 193 billion
6. Bank One Corp. — 150 billion (1)
7. U.S. Bancorp — 112 billion
8. SunTrust Banks, Inc. — 78 billion
9. BB&T Corporation — 67 billion
10. National City Corp. — 64 billion

(1) Since this report, J.P. Morgan Chase & Co. has acquired Bank One Corp., making the combined 6/30/04 deposit total for the merged company $377 billion, vaulting it to second place on the list.

>> wikipedia.org

Bangladesh : Banking 3

BANKING SERVICES:

Current Deposit (CD) Account:

Generally this sort of account opens for business purpose. Customers can withdraw money once or more against their deposit. No interest can be paid to the customers in this account. If the amount of deposit is below Taka 1,000 on an average the bank has authority to cut Taka 50 from each account as incidental charge after every six months. Against this account loan facility can be ensured. Usually one can open this account with Taka 500. One can open this sort of account through cash or check/bill. All the banks follow almost the same rules for opening current account.

Savings Bank Deposit (SB) Account:

Usually customers open this sort of account at a low interest for only security. This is also an initiative to create people's savings tendency. Generally, this account is to be opened at Taka 100. Interest is to be paid in June and December after every six months. If money is withdrawn twice a week or more than Taka 10,000 is withdrawn (if 25% more compared to total deposit) then interest is not paid. This account guarantees loan. Almost all the banks follow the same rules in the field of savings account, except foreign banks for varying deposit. On an average, all the banks give around 6 (six) percent interest.

SPECIAL SERVICES:

Some Banks render special services to the customers attracting other banks.

Internet Banking:

Customers need an Internet access service. As an Internet Banking customer, he will be given a specific user ID and a confident password. The customer can then view his account balances online. It is the industry-standard method used to protect communications over the Internet. To ensure that customers' personal data cannot be accessed by anyone but them, all reporting information has been secured using Version and Secure Sockets Layer (SSL).

Home Banking:

Home banking frees customers of visiting branches and most transactions will be automated to enable them to check their account activities transfer fund and to open L/C sitting in their own desk with the help of a PC and a telephone.

Electronic Banking Services for Windows (EBSW):

Electronic Banking Service for Windows (EBSW) provides a full range of reporting capabilities, and a comprehensive range of transaction initiation options. The customers will be able to process all payments as well as initiate L/Cs and amendments, through EBSW. They will be able to view the balances of all accounts, whether with Standard Chartered or with any other banks using SWIFT. Additionally, transactions may be approved by remote authorization even if the approver is out of station.

Automated Teller Machine (ATM):

Automated Teller Machine (ATM), a new concept in modern banking, has already been introduced to facilitate subscriber’s 24-hour cash access through a plastic card. The network of ATM installations will be adequately extended to enable customers to non-branch banking beyond banking.

Tele Banking:

Tele Banking allows customers to get access into their respective banking information 24 hours a day. Subscribers can update themselves by making a phone call. They can transfer any amount of deposit to other accounts irrespective of location either from home or office.

SWIFT:

SWIFT (Society for Worldwide Interbank Financial Telecommunication) is a bank owned non-profit co-operative based in Belgium servicing the financial community worldwide. It ensures secure messaging having a global reach of 6,495 Banks and Financial Institutions in 178 countries, 24 hours a day. SWIFT global network carries an average 4 million Message daily and estimated average value of payment messages is USD 2 trillion.

SWIFT is a highly secured messaging network enables Banks to send and receive Fund Transfer, L/C related and other free format messages to and from any banks active in the network. Having SWIFT facility, Bank will be able to serve its customers more profitable by providing L/C, Payment and other messages efficiently and with utmost security. Especially it will be of great help for our clients dealing with Imports, Exports and Remittances etc.

Banking Sector: CAMEL Rating 2005

Introduction

The Jews in Jerusalem introduced a kind of banking in the form of money lending before the birth of Christ. The word 'bank' was probably derived from the word 'bench' as during ancient time Jews used to do money -lending business sitting on long benches.

First modern banking was introduced in 1668 in Stockholm as 'Svingss Pis Bank' which opened up a new era of banking activities throughout the European Mainland.

In the South Asian region, early banking system was introduced by the Afgan traders popularly known as Kabuliwallas. Muslim businessmen from Kabul, Afganistan came to India and started money lending business in exchange of interest sometime in 1312 A.D. They were known as 'Kabuliawallas'.

Bangladesh Bank

Bangladesh Bank (BB) has been working as the central bank since the country's independence. Its prime jobs include issuing of currency, maintaining foreign exchange reserve and providing transaction facilities of all public monetary matters. BB is also responsible for planning the government's monetary policy and implementing it thereby.

The BB has a governing body comprising of nine members with the Governor as its chief. Apart from the head office in Dhaka, it has nine more branches, of which two in Dhaka and one each in Chittagong, Rajshahi, Khulna, Bogra, Sylhet, Rangpur and Barisal.

Banking Sector and CAMEL Rating:

14 A-class, 11 B-class, 12 C-class, 8 D-class & 3 E-class banks

A total of 48 scheduled commercial banks including 8 (eight) foreign banks have been operating business in Bangladesh through 6,383 Branches. Out of total business 56.5% handled by private commercial banks (PCBs) and rest 43.5% dealt by nationalized commercial banks (NCBs).

Deposit in banking system in 2005 stood at Tk 1,426 billion, registering 15% growth. Total assets increased by 14%, of which 8.2% in NCBs and 21.2% in PCBs. Total loans and advances during the year was Tk. 1,047 billion against total assets of Tk 1,725.5 billion. The cash balance in hand was Tk. 15.5 billion including the deposit with Bangladesh Bank (BB) of Tk. 86.3 billion. The total liability deposit of banking sector in 2005 was Tk. 1,725.5 billion including Tk 92.7 billion capital and reserve.

The total operations of every bank were assessed according to five fixed criteria. These criteria are capital adequacy, asset quality, Management Efficiency, Earning capacity and Liquidity (CAMEL).

Capital Adequacy: For the safety and protection of depositor’s benefit, capital adequacy must be maintained at 9%. It is also the coverage of financial debacles like loan loss, share market loss, foreign currency dealing loss, interest rate fluctuation loss and the protection for off balance sheet affairs hit. During the year 2005 the banking sector of Bangladesh has been able to keep an average 8.7% capital adequacy against the minimum requirement of 9%.

Asset Quality: A total of 60.7% assets of banking sector were used as loans and advances. But the high rate of classification has enhanced vulnerability of assets. In 2005, the classified loan of NCBs was 14.6% against the asset, which was 5.6% for PCBs, 0.9% for foreign banks and 26.6% for specialized banks. A good number of banks have not been able to keep required provision against the classified loan risk from the profit during the year.

Management Efficiency: Management is the key to the development and expansion of a bank. Management efficiency judged on the basis of the ratio of total expenditure to income, operational expenses and total expenses, per head employee income & expenditure and interest rate spread. The average expenditure-income ratio during the year 2005 was 102%, which is a painful scenario for our banking management.

Earning Capacity: Strong earning and high profitability is the good sign of a bank’s present and future strength. Any loss can be compensated from the profit of a bank. Earnings calculated on the basis of return on asset (ROA), return on equity (ROE) and Net interest margin (NIM) ratios.

Liquidity: The banks have to keep 16% SLR against their deposit with central bank, of which 4% average in the form of CRR. The central bank - Bangladesh Bank (BB) keeps CRR in current account and rest of SLR in cash and government securities. Islamic banks have to keep 10% SLR and specialized banks are given exemption of keeping the SLR but they have to keep 4% CRR.

CAMEL Rating: Analyzing the overall operational activities of all commercial and specialized banks; central bank, the regulatory authority of country’s banking sector has ranked 14 ‘A-class’, 11 ‘B-class’, 11 ‘C-class’, 9 ‘D-class’ and 3 ‘E-class’ banks by the end of 2005, which was completed recently.

A-Class banks: The 14 ‘A-class’ banks are Prime Bank, Mutual Trust Bank, Dutch-Bangla Bank, Bank Asia, Exim Bank, Mercantile Bank, Jamuna Bank, Dhaka Bank, BASIC Bank, Standard Bank, Commercial Bank of Ceylon, Citibank N.A, State Bank of India and HSBC.

B-Class banks: The ‘B-class’ banks are Eastern Bank, Premier Bank, The Trust Bank, BRAC Bank, Southeast Bank, NCC Bank, One Bank, Standard Chartered Bank, Woori Bank, Bank Alfalah and National Bank of Pakistan.

C-Class banks: Islami Bank Bangladesh Limited, Pubali Bank, Uttara Bank, National Bank, The City Bank, UCBL, Shahjalal Islami Bank, Al-Arafah Islami Bank, IFIC Bank, AB Bank, First Security Bank and Habib Bank.

D-Class banks: The ‘D-class’ banks are Social Investment Bank, Bangladesh Commerce Bank, Agrani Bank, Janata Bank, Rupali Bank, Sonali Bank, BSRS and RAKUB.

E-Class banks: Bangladesh Krishi Bank, Bangladesh Shilpa Bank and The Oriental Bank. It is revealed by the analysis that the top ranking banks were able to bring best results managing credit and asset efficiently.

>> Source: Weekly Industry, Issue: July 2, 2006, Bangladesh

NewsWeek Report

Bullish on Bangladesh

The headlines are grim. But they mask what is shaping up to be one of the world's most amazing turnarounds.

These days, it's not easy to be bullish on Bangladesh. Last month militant labor unions declared war on the country's vital textile industry, attacking dozens of mills and torching several in a struggle for wage hikes and new benefits. And just last week opposition parties bent on toppling Prime Minister Khaleda Zia staged a two-day national strike to demand electoral reforms ahead of parliamentary contests slated for early 2007. Their street actions temporarily closed the country's main port, halted public transport and triggered bloody clashes with riot police armed with tear gas, truncheons and rubber bullets. Observers warn that tensions could escalate as election season approaches; Britain's top diplomat in Dhaka, Anwar Choudhury, has voiced "grave concerns about the level of politically motivated violence."

Civil unrest is always worrisome in a densely populated nation that still ranks among the world's 50 poorest, to be sure. Yet what's remarkable about the grim headlines emanating from Dhaka of late is how little they threaten the country's stubbornly robust national economy. In spite of sporadic unrest, rampant corruption and a polarized political system that's all but dysfunctional, Bangladesh finds itself in the midst of a sustained boom. On June 8, Finance Minister Saifur Rahman forecast that the national economy would grow by 6.7 percent in 2006. The main drivers: surging export growth and a robust service sector.

In textiles, the country's mainstay manufacturing industry, export earnings rose by 17 percent last year to $7.5 billion, confounding forecasts that Bangladesh would lose market share to China once World Trade Organization textile quotas expired at the end of 2004. This year Bangladesh's garment makers expect to garner $10 billion abroad. Foreign investment is rising, too. The attraction is an economy that has expanded by 4 percent or more yearly since 1991, cutting the national poverty rate by 15 percent in the process. "Bangladesh is no more a country of despair," declared Rahman during his annual budget address earlier this year. "It is a country of hope and potential."

The Bangladesh boom defies some of development theory's central tenets. For decades, experts have identified political stability and effective governance as critical prerequisites for economic takeoff. But this lowland nation of 145 million is making tangible progress largely without them. Bangladesh now leads South Asia in most social-welfare indicators—including female literacy and poverty reduction. Its fertility rate is near replacement level. And Bangladesh is the only South Asian country on track to meet its United Nations-mandated Millennium Development Goals of reducing poverty by half by 2015. "When I go to India or Pakistan from Bangladesh, people ask, 'What is it you do, cook up all your statistics?' " says Muhammad Yunus, founder of microlender Grameen Bank. "They ask, 'Why are we falling behind when we're doing the right things, while you are doing the wrong things but getting the right answer?' "

There's no pat explanation for Bangladesh's unlikely success. Certainly, experts agree that the country urgently needs better governance to achieve its full potential of double-digit annual growth. Yet the country has disproved one assumption: that Asia's dynamic twin giants—China and India—would grow at the expense of their less efficient, less open neighbors. Instead, Bangladesh looks attractive as a cost-beating sweatshop economy precisely because China and India are thriving. Both have grown more expensive as manufacturing bases relative to Bangladesh, and rising domestic demand within each makes them attractive destinations for Bangladeshi exports.

In textiles, for example, Bangladeshi workers earn less than $1 a day to start, the lowest in the world, according to the International Labor Organization. Exploitation is rife, to be sure, but the mills nonetheless have given more than 2 million people—the vast majority women—nonagricultural wage jobs. In response to last month's factory raids, the government, industry bosses and labor unions cut a deal to raise wages in a pact announced last week, reducing the risk of further unrest. "As wages rise in China, Bangladesh will increasingly fill in the void," says Debapriya Bhattacharya, executive director of the Center for Policy Dialogue (CPD), a private think tank. "Bangladesh will not only successfully compete with Indian products abroad, but has a high potential to expand its market within India itself."

Funds critical to the nation's development often come from an unconventional source—broad-based microcredit schemes targeting the poor. Pioneered by Grameen Bank after Bangladesh's killer famine of the early 1970s, the strategy is to promote grass-roots development with collateral-free loans to poor households for investment in seeds, livestock, irrigation or village-level businesses. Today, an estimated 80 percent of households participate in some form of microcredit from Grameen or nongovernmental organizations.

That makes Bangladesh the test case in a new development-financing model. Experts laud microlending for a string of positive side effects. By targeting women (who have proved more reliable borrowers than men), lending schemes have pushed female participation in the labor force to among the highest in the developing world. As a result, Bangladesh's birthrate has plummeted, poor families have opted to put their girls as well as boys in school and women have taken a large role in local government—all in a predominantly Muslim country. "At the grass roots things have worked quite well," says Ifzal Ali, chief economist for the Asian Development Bank in Manila. "Rural literacy, basic health, provision of water [are] beginning to pay dividends. Compared to 3 to 4 percent growth earlier, there is now 6 to 7 percent. They're doing something right, no doubt about it."

But a concerted clean-hands campaign is needed to kick the economy into high gear. Corruption largely explains the endless red tape, crumbling ports and barriers to foreign investment that keep the country from achieving its full potential. "It's a barrier to every step we need to take," says Yunus, who adds without irony: "If we can bring down our corruption to the prevailing level in South Asia, our growth rate would be 9 to 10 percent."

Should Bangladesh experience destabilizing political turmoil in the coming weeks or months, its economy would certainly suffer. Tension in the garment industry remains high. Abdus Salam Murshedy, vice president of the Garments Manufacturers and Exporters Assocation, warns that the government "must protect our factories [from protesters], or else our achievements will be reduced to zero."

Yet even now, foreign investors have multibillion-dollar projects on the drawing board in Dhaka. The Indian conglomerate Tata has proposed building a steel mill and a power plant worth $2.5 billion in the area. And the government remains upbeat. "We could accelerate the growth momentum remarkably without destabilizing macroeconomic fundamentals," says Rahman, the Finance minister. Then, perhaps, Bangladesh would make headlines for something other than killer cyclones or riots in Dhaka's streets.

>> Source: George Wehrfritz and Hassan Shahriar, Newsweek Int’l, Issue: June 26, 2006