Gross Domestic Product (GDP):

Gross Domestic Product has a very precise definition that allows you to tell whether or not a transaction is part of GDP. It is very important that you learn this exact definition. GDP is the total market value of all the final goods and services produced within an economy in a given year. We know, GDP = C + I + G + NX Introduction Bangladesh, small state of South-East Asia with the total area of 144,000 sq km, cant still shake off the ill-reputation of being one of the least developed countries, shadowed by miserable poverty, high illiteracy rate and a gigantic population of 141, 340,476 (July 2004 est.) Moreover natural disasters such as seasonal inundation, cyclones, draughts etc. constantly pursue its lot every year, which break the backbone of the economy and frustrate future planning. Economy is sick with high inflation rate. The GDP, chief indicator of an economy, shows that for a long time, Bangladesh economy was backward. The years after independence, the size of Real GDP, Per Capita GDP and their growth rates was small. The condition improved from 1990. Yet, still the growth trend and the structural changes of GDP in Bangladesh are not satisfactory. Many problems are responsible for this unsatisfactory GDP. These are the shortage of domestic food production, narrow structure of exports, increasing growth rate of imports, failure in the invocation of much Foreign Direct Investment (FDI), a defective banking system with cumulative interest of loans, continuous loss in the public enterprises, poor infrastructure, inefficient taxation, high inflation rate, political instability and the serious deterioration of law and order situation. If these problems are solved, dynamic changes will come in the percentages of GDP. The two common terms are used in this study Growth and GDP. Growth Growth means something grown and growing. It is a process of becoming larger or longer or more numerous or more important. The word growth has some synonyms, such as, development, growing, increase, increment, etc. Economic growth means the economic development of a country, measurable by any indicator like GDP, prevailed in an economy, and commonly expressed in statistical and mathematical numbers.

There are two common and popular measures for the estimate of economic growth rate, as Gross Domestic Product (GDP) and Gross National Product (GNP). The growth of Gross Domestic Product is usually a good indication of economic growth. GDP GDP is the abbreviation of the economic term Gross Domestic Product. GDP is defined as the total value of all goods and services produced within that territory during a specified period (most commonly, per year). Another definition is that the GDP is the market value of all the goods and services produced by labor and property located in the region, usually a country. GDP can be estimated by two following ways--GDP= consumption + investment + government expenditures + exports - imports GDP=GNPThe net inflow of labor and property incomes from abroad. There are two types-----Nominal GDP and Real GDP. Nominal GDP, also called money GDP, is calculated on the basis of the current price or todays price, by which comparison between GDPs of different years may be incorrect because of the impact of inflation. Real GDP, also called Constant Price GDP, is estimated by converting current information into a standard price of a specific year or years, for example, 1985 takas, which can be more reliable than the first one and is more acceptable to the economists. A brief discussion of Bangladesh economy may help us to understand its GDP. Economy of Bangladesh is composed of three main sectors-----Agriculture, Industry and Service. Agriculture Agriculture sector includes crops, forestry, livestock and fisheries. Main agricultural food products are cereals, pulses, sugur/sugar, milk, meat, fish, fruits, vegetables, oil etc. Major Industrial crops are jute, tea, tobacco etc. Total cultivable area was 2.26 crore acres in the survey of 1983-84, which decreased to 1.64 crore acres in 1995-96. Long before and after independence war, agriculture was the dominating sector in Bangladesh economy. In the years after independence, agricultural products increased steadily; yet it couldnt keep pace with the rapid growth of population. Rice is the main food crop in Bangladesh. Bangladesh acquired the fourth place in the world for the production of huge rice in the middle of the 1980s, which was caused by the use of high yielding seeds, fertilizer and irrigation. Yet in the 1980s, Bangladesh had to import an average of 2 million tons of food grains each year to feed people. In the late 1980s, there was a progress in industrialization. But still about 50 percent of the value of GDP came from agriculture in Bangladesh. From 1990, industrial establishments

and foreign investments increased to a great degree, and agriculture was neglected, because of which its improvement was hampered and fell down sharply. Technological changes have come to agriculture greatly compared to those of the previous years. Use of fertilizer, irrigation equipment and high yielding variety (HYV) of rice has increased hopefully. Yet rice and wheat are being imported every year for the huge population. Domestic production of other agricultural products, such as, pulses, sugar, milk, meat, fish, vegetables and oil never fulfilled requirements of the country, rather remained short. Fish was being quickly depleted by the arbitrary use, which has been somewhat saved by cultivation. By 1980, forest covered only 16 percent of the total land in Bangladesh, which was also being destroyed by the unwise and unlimited use. So, its contribution to GDP went down to 1.89 percent in 1999-2000. Industry There are three categories of industries in Bangladesh Large Scale Industries, Medium Scale Industries and Small & Cottage Industries. Major industries are referred in the following--1. Food, Beverage and Tobacco 2. Textile, Apparel and Leather 3. Wood & Wood Products 4. Paper, Paper Product, Printing & Publications 5. Chemicals and Chemical Products 6. Non-Metallic Mineral Products 7. Basic Metal Industries 8. Fabricated Metal Products 9. Other Industries & Handicrafts In British and Pakistani colonial rule in Bangladesh, industries couldnt develop much. After independence, though this sector increased, it was not satisfactory. The highest growth rate of Industrial GDP was first counted as 8.1 percent in annual average in 1991-1995 at the constant prices of 1984-85. In these years, industrial establishments and foreign investments increased significantly by the help of the then government. According to Planning Commission Estimates there were about 32,000 small industries and 3,83,000 cottage industries in 1990.

The number of manufacture industries was 3,356 in 1981-82, which increased in 23,752 in 1988-89. Service Recently, this is the largest sector in the percentage contribution to GDP. Its major sub-sectors are construction, utility (power, gas, water), transport & storage, trade service, housing, public administration and defense, banking insurance and other professionals. Major Exports and Imports Major exports are readymade garments, frozen fish and seafood, tea, chemical products, raw jute and jute goods, leather etc. Major imports of Bangladesh are scrap vessels, rice, wheat, sugar, edible oils, oil products, fertilizer, machinery and equipment, chemicals, iron and steel, etc.

Foreign Exchange Reserve:

In its latest monetary policy statement, the Bangladesh Bank, the central monetary authority of Bangladesh, stated that the country will be better off with utilisation of the foreign exchange inflows in growth supportive investments than with accretion of ever reserves.2 The call has been made in the wake of the countrys burgeoning foreign exchange (forex) reserves that amounted to a record US$8.5 billion in August 2009. The central banks major concern is the opportunity cost of reserves build-up.3 However, the Bangladesh Bank has neither given any tailed account on the optimal level of reserves nor any roadmap on how to utilise the countrys excess reserves, if any. For Bangladeshs economy, an unprecedented rise in remittances in recent years has resulted in reserves accumulation. It is perhaps unique in the sense that the trade balance of current account or capital flows components (including foreign direct investments [FDI]) of capital and financial accounts generally lead to a surplus in the balance of payments (BoP) which eventually end up in reserves build-up, as can be noticed in East Asia and other emerging markets. Nevertheless, the reserves accretion has both advantages and disadvantages. A country has to maintain a certain amount of forex reserves to meet its import bills and other short-term payments or debt obligations, inter alia. But reserves accumulation in excess of optimal level comes with significant costs (both fiscal and social). Furthermore, the alternative uses of reserves are not the panacea. Such moves have faced a huge setback in recent times following the capital loss of some of the key SWFs.Hence, surplus in the BoP account and the consequent reserves build-up is a double-edged sword and poses a momentous challenge to the central bankers in moulding monetary policies. Research on the different aspects of reserves accumulation is vast but little has been done in Bangladesh. Against this backdrop, the aim of the paper is to provide a simple analysis of Bangladeshs forex reserves, particularly focusing on the countrys key macro variables including its external economy, and its reserves position vis--vis some conventional reserves adequacy criteria. The paper also attempts to evaluate the usefulness of these global benchmarks

in the local circumstances. The rest of the paper is organised as follows. In Section II, we discuss the existing literature pertaining to reserves accumulation. The recent dynamics of some of Bangladeshs macro and financial variables, particularly the trends in its savings, investments, balance of payments (BoP) and exchange rate, that have direct association with reserves accumulation are analysed in Section III. Based on a back-of-the-envelope calculation, the reserves adequacy measure for Bangladesh is discussed in Section IV. In Section V, we look at the costs and benefits of reserves accumulation in the context of Bangladesh emphasising on its macroeconomic and financial sector dynamics. The question of alternative uses of the countrys reserves, if any, will be discussed in Section VI. The final section concludes the paper. Reserves Accumulation: The Literature The International Monetary Fund (IMF) defines an economys international reserves as those external assets that are readily available to and controlled by monetary authorities for direct financing of payments imbalances through intervention in exchange markets to affect the currency exchange, and/or for other purposes.8 Before we examine whether Bangladesh is in a position to use some of its forex reserves for infrastructure development or other productive purposes, it is essential to explore the literature on this issue. The literature on the various issues under this rubric is vast and burgeoning, so our discussion should be seen as nothing more than a helicopter tour. We shall explore some key issues pertaining to forex reserves. These include motivations behind emerging markets and other developing countries reserves accumulation, the optimal level of reserves, the opportunity costs of reserves build-up and their alternative uses. Nevertheless, whatever the intentions, the forex reserves build-up in most circumstances is a byproduct of domestic currency undervaluation (or to resist currency appreciation) vis--vis its major trading partners that ultimately makes the concerned countrys tradables relatively competitive in the international markets. However, a critical point here is that the success of this strategy depends on how open or closed an economy is.13 In theory, a country cannot maintain a fixed exchange rate, free capital movement and an independent monetary policy, concurrently known as the impossible trinity, a fundamental contribution of the Mundell-Fleming framework.14 However, the open-economy trilemma might break down under certain conditions, particularly when the central banks target exchange rate with an excess supply of foreign exchange.15 The massive reserves accumulation in emerging markets indicate that countries can converge towards intermediate levels of the trilemma, banking on a managed float exchange rates while maintaining some degree of monetary autonomy and accelerating financial openness. In other words, many countries have achieved the intermediate level of this trilemma using forex reserves as a buffer.16 To sum up, irrespective of precautionary or mercantilist motives, reserves shield developing economies form financial distress, particularly when countries face a sudden stop in foreign capital flows or witness a reversal of flows. This is particularly important for countries that have institutional bottlenecks. A comfortable level of reserves minimises a countrys sovereign default risk. Finally, a substantive stock of reserves could potentially lower the concerned countrys

borrowing costs.

Recent Macroeconomic and Monetary Developments in Bangladesh Economy How is this conventional wisdom of optimal reserves useful for Bangladesh, and where do its forex reserves stand vis--vis the reserves yardsticks we have discussed in the preceding section? Before we do a back-of-the-envelope calculation of Bangladeshs forex reserves, we need to look at some of its key macro variables that have implications for reserves build-up. The Bangladesh economy has demonstrated significant economic growth in the past one and a half decades, owing to marked improvements in its key macro variables including steady development in its external sectors. Its exports and imports are growing steadily, aid flows are waning, and remittances are skyrocketing. As a result, the countrys major macro variables are relatively better than compared to that of a decade ago. But there are some pitfalls too. Figure 1: Savings-Investment Gap and Forex Reserves Accumulation in Bangladesh: 1997-98 to 2008-09

As seen in Figure 1 (the left scale), there is a substantive gap between Bangladeshs gross domestic savings (GDS) and gross domestic investments (GDI). Generally, imported savings that are reflected in gross national savings (GNS) fill the gap. In the case of Bangladesh, the gap has been bridged historically by GNS but since 2005-06 one can see a growing divergence between GNS and GNI. From the macroeconomic perspective, this scenario is seen either as a savings glut35 (that one observes in China) or an investment drought (other emerging Asian economies). As evident from the slope of GNI, Bangladesh falls into the latter group owing to its investment drought. This is partly due to its underdeveloped financial systems,36 and partly due to other structural problems in the economy entailing difficulties in properly channeling national savings to investments. This development has led to a surplus in Bangladeshs current account (BoP) that eventually ends up in reserves accretion. The right scale of Figure 1 shows the trends in its forex reserves. One gets a relatively better picture of Bangladeshs forex reserves by assessing its BoP position, particularly dynamics in its current account. It is current account surpluses that led to the huge reserves accumulation in East Asian countries. Figure 2: Trends in Balance of Payments of Bangladesh: 1998-2008

The BoP position of Bangladesh (see Figure 2) shows that the country ran a modest surplus in its capital and financial accounts until recently, whereas its current account had been volatile until 2005-06. So, a consistent surplus in its current account is a very recent development. The economy has been experiencing a steady trade deficit (both exports and imports are on the rise with import growths outpacing export growth) but the private transfer component of the current account has witnessed a steady growth largely owing to workers remittances (see Table 2). Lately, Bangladesh has become one of the leading remittance recipient countries. Despite

leakages in the countrys capital and financial accounts37 and trade account, remittances help maintain the overall surplus in its BoP. Empirical studies on Bangladeshs equilibrium current account balance support this analysis. Theoretically, current account is positively correlated with fiscal balance, economic growth and private transfers and adversly with net foreign assets. Table 2: Major Components of Bangladeshs Current Accounts (in million US$)

An IMF estimation on Bangladeshs equilibrium current account shows that the countrys current account balance has improved markedly thanks to its economic growth and remittance inflows (private transfer).Figure 3 illustrates Bangladeshs current account norm along with the projected medium-term current account which is based on medium-term projection values for fiscal balance, GDP growth, private trasfers and NFA. Figure 3: Bangladeshs Equilibrium Current Account (% of GDP)

Despite this positive scenario, one needs to assess Bangladeshs current BoP balances (thus forex reserves) with some caution. Bangladeshs imports bills were marginally lower in 2008-09 than the previous fiscal year, thanks partly to a bust in global commodity prices, although exports witnessed a modest growth. The excessive inflows of remittances could possibly be due to the repatriation of savings by overseas Bangladeshis who lost their jobs in different parts of the world during the financial crisis or their savings found limited investment opportunities in overseas capital markets. These two developments could slightly overstate the BoP positions of Bangladesh vis--vis its recent past

Foregin Currency Reserves in different times in Bangladesh

Introduction Either from political or economic perspective a very sensitive indicator for any government is to maintain a satisfactory level of international reserve in its coffer. If the amount of international reserve of the central Bank falls below the countrys three months import bill, the situation is considered as critical. Historically international reserves of Bangladesh have not been much promising. On many occasions its reserve balance were not able to pay for its import bill (see figure in the appendix B, lower panel). A country needs foreign reserves mainly for two reasons: (i) to synchronize its receipts and payments with the rest of the world, and (ii) to withstand occasional speculative raid by the dealers in the foreign exchange market. It somewhat resembles the households precautionary demand for cash balance. The paycheck comes in at the end of each month, but the familys purchases are spaced out irregularly over the month. Hence it is both handy and prudent to keep some cash balance even though the requirement for cash may dwindle to nothing when the next

paycheck arrives. The reserve position of a country is determined for the most part by the nature of its transaction with the rest of the world and the corresponding flow of fund into or out of the country. On this ground trade balance is an important factor for determining a countrys reserve position. For Bangladesh like many other developing countries foreign aid and remittance inflow have been two major factors in creating reserve balance. These three variables have been controlled for when evaluating the performances of the three major political regimes in Bangladesh. The study uses dummy variables to represent the political regimes and on basis of estimated coefficients of these qualitative variables conclusions are arrived at about the performances of the three regimes in maintaining international reserve position. The paper is organized as follows. Objectives of the study are stated in the second section. Relevant variables are defined in section three. Sources of data are also contained in this section. The most important part of this paper is section four which contains model specification, estimation, and analysis of the results. Section five concludes the paper with some recommendations. Definition of variables and Sources of Data International reserve (IR): The amount of liquid asset hold by the central Bank in terms foreign currency in order to synchronize receipt and payment with foreign country and to withstand occasional speculative activities raid by the dealers of foreign exchange.

Performance Measurement (DRM): Performance in each year is measured as excess of international reserve over the periods average three months import bill. Obviously, positive and higher values of the variable will indicate better performance.

Foreign aid (AID): Foreign Aid is defined as the sum of food aid, commodity aid and project aid that was disbursed in each year. Aid in physical term for example commodity or project aid indirectly contributes toward foreign exchange reserve buildup as it reduces the need for importing these material by spending foreign currency.

Remittances (REM): It is defined as the amount of foreign currency sent by the Bangladeshi nationals working abroad. The role of remittances got prominence in 1974 when Wage Earners Scheme (WES) was introduced. The WES provided incentives for sending money through official channels. Expatriate workers could now send their money at rates corresponding approximately to the open market rate. International remittance has played a significant role in reducing dependence of the government on Foreign Aid. In the appendix B it is clearly seen that declining role of foreign aid has well been taken over by the heroic role of the earnings of expatriate workers. Since liberation foreign exchange earnings were composed of mainly foreign aid, export earnings, and remittances. Foreign aid was the major component of reserve during the early seventies. But subsequently Bangladesh has been able to diversify its export and as a result export earnings increased significantly. Of late wage earners remittances are playing a dominant role in the foreign exchange reserve. This reserve leaks out in the form of paying import bill, paying for factor earnings of foreign nationals, paying bill for obtaining health service and education abroad. So it

is apparent that net balance of foreign exchange reserve should depend on net export or trade balance, foreign aid and factors that affect these two variables. We have chosen political regimes as an indicator of policy environment that can affect reserve. Since this is a qualitative variable it is introduced in the model as dummy variables. V: Concluding Remarks A sound level of foreign exchange is an indication of a countrys healthy foreign sector. Especially when a government is keen to keep its currency stable and avoid fluctuating exchange rates there is no alternative to maintain an adequate amount of foreign exchange reserve. In the presence of huge amount foreign exchange reserve speculators feel shy to attack a currency and devalue it forcefully. Compared to the neighboring countries Bangladesh does not posses an attractive amount of foreign exchange reserve. For example, Indias balance of foreign exchange reserve in June 1996 was 165.542 billion US dollars whereas the corresponding figure for Bangladesh was only 3.650 billion US dollars at that time. Export earnings, foreign investments, and remittances play important role in building foreign exchange reserve. The study finds foreign aid to be the strongest determinant of foreign exchange reserve for the sample data. But Bangladesh should not rely on this source for building its reserve. After the breakdown of the Soviet Union and other communist countries, developed countries are increasingly diverting their aid funds toward these countries thus inevitably reducing the fund flow to the other developing countries. In these changing circumstances it is in the developing countries interest to turn their attention to finding ways of increasing their export earnings through diversification or other export promotion measures. At the same time since Bangladesh has potential for exporting its huge unskilled manpower, government can take initiative through diplomatic means to persuade countries like Malaysia and Middle East where there is shortages of unskilled manpower to import more manpower from Bangladesh. If Bangladesh can sustain her increasing trend of remittance earnings, export earnings and foreign direct investment flows, we can expect a further boost in its reserve level in the near future.

The Falling Bangladeshi Currency:

There is a lot of talk these days about the falling value of the Bangladesh taka in terms of the US dollar. The dollar itself has been depreciating against other major global currencies. For example, between June 2010 and mid-July 2011, the dollar depreciated by 14 percent against the euro and 10 percent against the yen. So, the fall in the value of the Bangladeshi currency at a time when the dollar is weakening against the major global currencies and many other Asian currencies are appreciating against the dollar is viewed with a great deal of concern. Some worry that this is a reflection of a lack of confidence in the Bangladeshi economy. Others worry that depreciation will increase the already high inflation rate. At the political level, Bangladesh Bank (BB) is coming under pressure to arrest the decline in the value of the Bangladeshi currency. While the debate is understandable, simply creating political pressure on

BB without analysing the underlying factors creates a risk that wrong and inconsistent policy decisions might be taken. The objective of this article is to explain the reason for the decline and provide some policy options that might help stabilise the currency without creating problems for other economic targets. In simple language, the exchange rate, measured as a number of units of local currency per unit of foreign currency, is the price of the foreign currency in terms of the local currency. Its inverse is the price of the local currency in terms of the foreign currency. Like any other price, the value of the foreign currency in the local market depends on its supply and demand. For simplicity, I will use the US dollar as the representative foreign currency for the Bangladesh exchange market. Between fiscal 2007 and fiscal 2010, the price of the dollar was nearly constant at around Tk 69 a dollar. The price started rising in 2011, reaching Tk 75 in early July 2011. As is well known, there is also a kerb market for the foreign currency where the exchange rate is more flexible than in the official market. Consequently, the price in the kerb market and its trend are a better reflection of the true foreign exchange market situation. Usually, the differential between the official price and the kerb market price is small -- around one taka. However, in periods of demand pressures the differential between the kerb market price and the official price tends to rise. Presently, the price of the dollar in the kerb market has reached Tk 78, creating an unusually large differential of Tk 3 per dollar. Unlike in Bangladesh, currencies in China, Thailand, Malaysia, Korea, Singapore and India are all appreciating against the US dollar -- implying that the price of the dollar is falling in these economies. For example, the price of the dollar fell from 6.8 Chinese yuan in 2010 to 6.5 yuan in July 2011. In India, the price of the dollar fell from 48.1 Indian rupees in March 2009 to 44.7 rupees in July 2011. In Thailand, the price of the dollar declined from 32.4 baht in 2010 to 30.4 baht in July 2011. The price of the dollar similarly declined in Malaysia, Korea and Singapore. The rising price of the dollar in Bangladesh in both the official and kerb market, along with the growing differential in the two rates, is a clear indication that demand for dollar in Bangladesh is growing much more rapidly than supply. The rise in the price of dollar is a market correction to equilibrate demand and supply. As in any market, the price should play an important role to correct market disequilibrium. So in this sense, there is nothing wrong for the price of dollar to go up in order to bring supply and demand in harmony. This raises three important questions. First, why is the demand for dollar growing faster than its supply? Secondly, can BB intervene and control the local price of the dollar? After all, the price was stable in 2008-10. Why can this not be done now? Thirdly, why is the price of the dollar falling in other Asian countries while it is rising in Bangladesh? The answers to these questions are inter-related and provide the analytical base for designing proper policy responses. Between 2008 and 2010, Bangladesh experienced a remarkable period of rapid inflow of foreign currency measured in US dollars. The main contributors were growth in export earnings and the flow of remittances. Together, these two sources provided much more dollars than were needed for import payments and foreign debt servicing.

Consequently, Bangladesh experienced record surpluses in the current account of the balance of payments. The surplus was $2.4 billion in fiscal 2009 and $3.7 billion in fiscal 2010. Owing to these large surpluses, Bangladesh was able to finance the deficit in the capital account (around $260 million on average a year) and build up its reserve cover. Foreign reserves increased from a low of $6.1 billion in June 2008 to $10.7 billion in June 2010. Because of this very favourable supply situation relative to demand, the dollar price did not rise. If BB had not built up the reserve base, the excess supply of dollars would have driven down its price and the Bangladesh currency would have appreciated in nominal terms. Building up reserves was the right policy decision because the reserve cover was low (measured in months of imports). Additionally, the taka was appreciating in real terms because the inflation rate in Bangladesh was much higher than in OECD countries. An appreciation of the nominal exchange rate would have further appreciated the taka in real terms and hurt exports. The balance of payments situation changed dramatically in fiscal 2011. While exports of goods and services measured in nominal dollars grew even more rapidly than in the past, registering an expansion of 37 percent over the level in fiscal 2010, imports of goods and services increased at an unprecedented pace of 41 percent. As a result, the trade balance widened by 56 percent -from $6.4 billion in fiscal 2010 to $10.0 billion in fiscal 2011. As compared to this, remittances grew modestly by 5.5 percent. Consequently, the large positive balances in the current account during the past few years virtually disappeared. The deficit in the capital account has also prevailed. BB initially tried to accommodate the rising demand for dollars by releasing funds from its reserve base. But it soon recognised that this surge in the growth of imports is not sustainable and must be lowered. As a first step, it let some of the pressure go the exchange market. The price of dollar started rising. This increase in the price was aimed at reducing the demand for imports and providing more incentive for exports. Although allowing the exchange rate to correct the excess demand pressure in the foreign currency market is a correct policy move, letting all the adjustment fall on the exchange rate may not be the right policy, especially because a drastic fall in the exchange rate would come in conflict with the objective of inflation control. A review of the underlying factors contributing to the huge growth in imports suggests that they comprise of two forces, one positive and one negative. The positive force constitutes demand emerging from growing real income, investment and exports. The negative force relates to demand emerging from excessively rapid growth in money supply (22 percent a year in the past two years) contributing to growing inflation (more than 10 percent on a year on year basis between June 2010 and June 2011 as compared with 3.5 percent in the USA). It is obvious that the correction of the excess demand in the foreign currency market must also involve actions to reduce overall demand in the economy by lowering monetary growth. A lower rate of monetary growth will reduce domestic inflation and demand for imports. Very recently, BB has taken action to reduce the rate of growth of money supply.

The combination of a reduction in monetary growth that reduces demand by increasing the interest rate and the rising price of dollar is indeed the right policy approach in the present situation. Both policies will lower demand for imports and help stabilise the balance of payments. Indeed, the monthly import flow data suggests a downward trend in demand for imports since May 2011. Other policy actions that will help the balance of payments include policies for boosting exports, supporting the growth of remittances and the mobilisation of foreign capital. The positive role of foreign capital is illustrated by the experience of dynamic Asian economies. The Asian countries that have experienced an appreciation of their currencies have an overall surplus in their balance of payments, with some combination of surpluses in the current account or capital account or both. For example, China registered large surpluses in both current and capital accounts. The yuan ought to have appreciated much more rapidly due to these large net flows of foreign exchange. China instead has influenced the exchange rate by accumulating huge reserves ($3.2 trillion as of the end of June 2011) in order to preserve the incentive for exports. Indeed, this policy intervention has served China well, but has come in serious conflict with the OECD countries who argue that this policy is creating a bias against their exports. Malaysia, Thailand and Korea similarly have significant current account surpluses and are accumulating reserves, which explain their appreciating currencies. India on the other hand has a significant current account deficit but still its currency is appreciating against the dollar. The reason for this is the surplus in the capital account, owing to a huge inflow of direct foreign investment and portfolio investment, which exceeds the deficit in the current account. As a result, the total supply of foreign exchange exceeds demand. The experience of the Asian countries provides another policy option to manage the exchange rate -- through foreign capital flows. This policy can also reconcile the objective of securing higher investment and growth while maintaining balance of payments and exchange rate stability. Financing of infrastructure and investment in large manufacturing units through direct foreign investment is a hugely attractive policy action for Bangladesh. This will allow a financing of larger volume of imports without exerting pressure on the exchange rate. Over the longer term, the most important policy for preserving the value of the Bangladeshi currency is to keep inflation under control. If the inflation rate in Bangladesh continues to be substantially higher than the US inflation rate, demand for dollar will continue to exceed its supply and the price of the dollar in taka terms will continue to rise over the long term. This is illustrated by the fact that the taka depreciated against the dollar by about 4 percent a year on average over the past 21 years, between 1990 and 2011. During the same period, the average inflation rate in Bangladesh was 6.1 percent as compared with an US inflation rate of 2.8. Much of the long-term depreciation of the Bangladeshi currency is explained by a substantially higher inflation rate in Bangladesh, compared to the US inflation rate.

Inflation Rate:
Inflation and Bangladesh The current up trend of inflation rate is not good for Bangladeshs economy, which is already roaming with luxury double digit. This is no way a good sign or indicator for economic progress, which the Government is aspiring. This must be stopped what is called the crazy horse of inflation, which eating up of peoples savings, home, food and future. We are already in doubt whether the projected Gross Domestic Product will be achieved in the fiscal year 2011-12, subject to the following conditions are met positively

If Bangladesh could indeed bring about positive fruits from its export of garments to India, which recently agreed upon between the two countries in a signed protocol; If the foreign remittance flow pour in regularly and satisfactorily; If infrastructural development is done as per plan; If utility services, like power, gas and energy could be ensured adequately; If proper investment from abroad, and local entrepreneurs could be achieved.

In both the demand and supply are under pressure due to unprecedented rate of inflation in recent year, particularly in the period of this government. On top of this phenomena the fear and

speculation of inflationary rise due to wrong government measures or economic mismanagement and indiscipline inflation is inflamed. In this September 2011 inflation rate stood at 12%, which is 9.41% in India.

Reasons behind this inflation are as follows:

Price hike in international commodity market, which incited the domestic market; Price rise of fuel oil also contributed to the commodity inflation in the domestic market; Weak monetary policy also increased money supply in the market; Counterfeit money is also contributing as a dormant factor; Government borrowing from private banks, approximately Tk. 10,00,00,000/- everyday and spending it to non-productive sector, mostly by paying government recurring or revenue expenditure, e.g., salary and maintenance of government offices and institutions; Military expenditure; Private banks losing its fixed deposits as the clients are withdrawing its fixed deposits to support the rising cost, so, liquidity is squeezing; The reason for clients withdrawal is partly related to www.Unipay2you.com and www.speakasiaonlinesurvey.com who cheated people with billions of Taka, for which Government could not deny its responsibility, more pathetic is some corrupt government officials also involved with this scams and got benefited. As people lost their regular hard earned resources, last resource is the future insurance fixed or term deposits which they keep for future. Decreasing the investment of businessmen and investors: Following reasons are responsible for decreasing the investment of businessmen and investors: i) Businessmen and investors are not interested to invest in this country for the non confidence to caretaker government. ii) Investing a huge amount of money earned by corruption is closed now for anticorruption initiative taken by caretaker government. iii) Decreasing the purchasing power of micro businessmen by creating their unemployment. For this reason, investors are not investing in the country considering the lower purchasing power of consumers. iv)Businessmen and investors are confused on the question that who is actually dominating our country among caretaker government, military government and international donor agencies? They do not know who is actually giving the direction of power. Decreasing the purchasing power of general people: Higher price of products in international market exists from previous two or three years. We can blame following reasons for higher price of products as well as decreasing the purchasing power of general people:

i) Destructive activities of immoral syndicates of the period of union (BNP-Jamat) government. ii) Investors are not investing in country and showing signal that production will decrease in near future. For this reason, businessmen are not selling their products, storing products and creating shortage of products to earn more money. iii) Production of rice is not as much as our expectation. Businessmen are not interested to import rice from abroad by investing a huge amount of money for the luck of confidence on caretaker government. iv) Institutions are following the primitive institutional structure because care taker government has not taken any positive initiative to restructure institutional structures. V) Price of products has increased for the hindrance of supply. So, people are facing the problem of inflation.

To control this high inflation rate the following steps could be followed:

Controlling of money supply and printing; In the last two years supply flow was much higher than usual; Private banks must control their loans; Government borrowing from commercial banks; Bangladesh should follow China and India in monetary policy strategy, which revised interest rates 12 times in the last 18 months; Bank of China revised two types of loan interests nine times.

So, Bangladesh Government must pursue drastic measures in controlling the inflation rate in order to have its budgetary goals and economic growth rate 8%. If it goes on like what is now, the government would never be able to achieve its goal of binding the inflation rate at 7.5%. If inflation could not been bottled up, the country would be in deep trouble, not the political leaders, as they have dual passports and links abroad to fly leaving the people in distress.

Current Hypotheses on Inflation in Bangladesh:

Rising rate of inflation has become a serious concern in Bangladesh in recent years. The impact of rising inflation rate is being felt almost everywhere. The prices of essential commodities have gone up, and so is the cost of living. Countrys vast multitude of poor and unemployed people is having a difficult time to survive. According to the estimates by the BBS, the inflation rate, on a point-to-point basis, in June stood at a 10 year high of 9.20 per cent. The corresponding food inflation rate was 9.82 per cent, and BBS reported that inflation on a point-to-point basis in urban areas was 10.71 per cent. It is feared to go up even further due to floods and Ramadan.

There have been a number of hypotheses put forwarded by the economists, policy makers and donor agencies, like IMF, World Bank and ADB, with regard to the causes of inflation in Bangladesh. Here we provide a brief critical overview of these hypotheses. Hypothesis 1: Rising prosperity Bangladesh has been one of the high growth performing economies over the last 10 years. The GDP base of Bangladesh is not so small that achieving high growth rates would be relatively easy, as in absolute volume terms it represents the 50th largest economy in a sample of 177 countries. Only four countries have grown faster than Bangladesh with bigger GDP volumes during 1996-2005 (Figure 1).

Figure 1: GDP Size and Growth Rate

During 1996-2005, the GDP per capita of the country has also increased by 3.26 percent per annum. In terms of the high per capita GDP growth rate Bangladesh ranks 49th among 177 countries. Only three countries have experienced faster per capita GDP growth rate than Bangladesh with bigger population size during 1996-2005 (Figure 2).
Figure 2: Size of Population and Per Capita GDP

The proponents of this hypothesis postulate that the high growth rate of GDP and the per capita GDP in particular has led to the creation of excess demand in the economy which resulted in a demand-pull inflation. World Bank, IMF, ADB, and to some extent the government policy makers in Bangladesh, are in favour of this view. However, such views have been questioned by some economists in Bangladesh who consider that high growth rate of GDP should not create any excess demand in the economy as the growth in GDP will also ensure supply of commodities3 (Osmani, 2007). In our opinion, there are merits in the arguments of both sides. The rise in income (if only equitable) has the natural tendency to exert excessive pressure on demand in the economy. However, such excessive pressure on demand may be met by increased imports, if not by local production. Imports of consumer goods have been experiencing high growth during the last five years (Figure 3). Figure 3: Imports of Consumer Goods

We, therefore, can argue that the rise in per capita income may be one of the factors responsible for creating excess demand situation, but it cant be the major reason for inflation in recent years. However, skewed distribution of the national income does undermine to some extent the case for creating excess demand of goods and services consumed by ordinary people who are our focused group here. Hypothesis 2: Rising food prices in international market Bangladesh is a net food importing country. As a result, any rise in food prices in the world market push the domestic prices of those commodities to increase. In recent years the prices of essential commodities, like rice, wheat and edible oil have increased significantly in the international market (Figure 4).
Figure 4: Rising Prices of Food in the World Market

The rising world food prices have also serious poverty implications for Bangladesh. Using a dynamic CGE model for Bangladesh we simulated a scenario for a 50 per cent increase in the world price of rice, wheat and edible oil. It appears that, under this scenario, the overall consumer price index would rise by 2.3 per cent. This would lead to a rise in head-count poverty by 0.31 percentage point in the rural area and 0.41 percentage points in the urban area. The number of people falling below the poverty line income becomes around 69,500 in the rural area and around 23,000 in the urban area. Table 1: Rise in world price of rice and poverty in Bangladesh

It appears from the above analysis that rising world prices of food lead to raise the consumer price index with significant margin, and as a result have some profound negative impacts on inflation and poverty in Bangladesh. Simultaneously the issue of food insecurity (or perhaps hunger) will be a matter of greater concern. Hypothesis 3: Rising fuel prices Bangladesh government increased fuel prices in April 2007. Prices of diesel and kerosene were increased, on average, by 21 per cent. Arguments have been put forwarded by the World Bank, IMF, and the ADB that the increase in fuel prices would not have any impact on rising rate of inflation, as diesel and kerosene constitute a very low share in the basket of commodities used for the calculation of the CPIs. However, the rise in fuel prices is likely to have some indirect impacts onthe prices of commodities through two major channels. First, the high prices of fuelslead to high cost for irrigation, which raises the cost of agricultural production. Second, high fuel prices increase the cost of transportation, which also raises the

prices of essential items transported from remote villages to urban areas. Using the Bangladesh CGE model, we simulated for a scenario of a rise in diesel andkerosene prices in Bangladesh by 21 per cent (as executed in April 2007), and it appears that such a rise in the fuel prices increases the consumer price index by 1.1 per cent. Fuel price rise also has some poverty implications, as this would lead to an increase in head-count poverty by 0.11 percentage point in rural and 0.19 percentage points in urban areas. Under this scenario around 25,000 rural and 11,000 urban households fell into poverty. Table 2: Rise in fuel prices and inflation and poverty in Bangladesh

Therefore the increase in the prices of diesel and kerosene in April 2007 has contributed to the rising trend of inflation in Bangladesh.

Hypothesis 4: Growth of money supply It is often argued by the international lending agencies (i.e., World Bank, IMF and ADB) that inflation is a monetary phenomenon, and it is caused by the excessive supply of money in the economy. Until very recent past, the position of Bangladesh Bank has not been very different from this perspective. While it is true that the broad money growth increased steadily during 2001 and 2007 (with a record growth of 22 per cent in December 2006), along with a rising inflationary rate, the lessening of the broad money growth since Match 2007 did not have any impact as regard to restraining the rising inflationary trend. Guided by the monetarist approach to inflation, the Bangladesh Bank had been following a rather contractionary (cautious in its term) monetary policy, as a result of which the growth rate of domestic credit fell to 14.9 per cent in 2006-07 as against its growth rate of 20.45 percent in 2005-06. To our opinion, such a contractionary monetary policy has been ineffective in controlling inflation. A tightened monetary policy is unwelcome when the economy has shown signs of near stagflation with slower growth, high inflation and high impact on investment, employment generation and economic growth for Bangladesh. Very recently, Bangladesh Bank has changed its position, and has announced to move from a contractionary monetary policy to a cautious expansionary monetary policy. We consider this as a pragmatic step. Hypothesis 5: Depreciation of Bangladeshi Taka vis--vis Indian Rupee Since 2002 Bangladeshi taka has depreciated much against US dollar while Indian rupee has been appreciating (Figure 5). This has resulted in a major depreciation of Bangladeshi taka against Indian rupee (Figure 6). India is one of the major sources of Bangladeshs imports, as imports from India in recent years constitute more than 20 per cent of Bangladeshs total imports comprised of many essential food items. As a result, import cost for Bangladesh has gone up.

Hypothesis 6: Non-competitive market (Syndicate) The syndicate hypothesis argues that many middle-men, wholesalers and importers are acting as syndicates and are causing huge price hikes, by making cartels and hoarding essential goods like rice, wheat and edible oil. These cartels fix the prices of these goods, dictate supply in the market, and earn excess profits. This hypothesis has become one of the dominant hypotheses in explaining inflation in Bangladesh. There are, however, a number of counter-arguments of this hypothesis. First, it is argued that there is no concrete evidence of the existence of syndicates in the markets of essential commodities. Second, though there are imperfections in the market, and as a result consumers are paying higher prices than the perfectly competitive prices, this phenomenon cannot explain the accelerating inflation. In general, imperfect market is likely to affect the level of price, but in order to have effective influence over accelerated price rise, the market concentration must also increase at an increasing rate, which is argued to be non-existent (Osmani, 2007). In our opinion, though there are no concrete evidences of established syndicates in the markets of essential commodities, taking advantage of the weak consumer protection laws, there might be some short-term alliances among the suppliers of these goods to influence over supply and prices. This may have some impact on the rising prices of essential items.

Hypothesis 7: Anti-corruption drive and disruption of supply chain It is thought that due to the recent anti-corruption drive many businessmen have contracted their usual business activities with the fear of legal actions. Furthermore, many informal marketplaces, both in rural and urban areas, have been wiped out by law forcing agencies on legal grounds. Such actions have resulted in a disruption in the established supply chains, which certainly have exacerbated the inflationary trend. In our opinion, regaining the confidence of the businessmen in their usual business activities is very important for the smooth functioning of the supply chain. This is very important, not only to curb inflationary pressure, but also to get rid of the current state of stagnation in the economy. Hypothesis 8: Slow growth in agriculture There is a declining trend of growth in agriculture over time, especially of the crop sector in Bangladesh (Figure 7). This has resulted in less domestic production relative to the domestic demand.
Figure 7: Growth in agriculture and crop sector

Slower growth in agriculture, and especially of the crop sector, is due to a number of factors: (i) failures in timely supply of fertiliser, seed and pesticide to the farmers; (ii) increased cost of irrigation because of rise in diesel price as about 70 per cent irrigation pumps are run by diesel; (iii) decline in the availability of cultivable land because of population growth and rehabilitation; (iv) change in pattern of crop production, as there are increasing tendencies to switch over to the cultivation of exportable crops that are more profitable; and (v) wastage of about 30 per cent vegetables because of shortage of cold storage. Severe flood during July-August 2007 has also exacerbated the situation. To our opinion, slow growth in agriculture, and especially in food production, is one of the major causes of accelerated inflation in Bangladesh in recent years. Hypothesis 9: Growth of remittances Bangladesh has been experiencing a steady rise in remittance inflow over the last few years. In 2006-07, the growth of remittances was 24.49 per cent. There are arguments that such inflow has also contributed to demand-pull inflation in Bangladesh. Though there are some merits in this argument such as the Rising Prosperity Hypothesis, increased remittance inflow is unlikely to be a major cause of inflation, as the rise in demand has been supported by the rise in supply through increased imports. There are number of factors behind the rising trend of inflation in Bangladesh. The factors contributed the most in the rise hike of essential items, particularly food, are slow growth in agriculture, rise in the world prices of food items, sharp depreciation of taka against US dollar and especially against the Indian rupee, and rise in the prices of diesel and kerosene.

Other Causes & Effects of inflation:

1. Increase in food prices and impact on inflation
The inflationary situation in Bangladesh is on the rising trend especially since August 2009, primarily owing to the soaring increase in food prices. The food price hike has accelerated the general inflation rate in the country. If the food price level rises at an existing rate of 1.31 percent per month and if adequate anti inflationary measures are not taken, the overall general inflation might touch a double digit figure. The current rate of rise in inflationary pressure suggests that the rate of general inflation might reach to 10.71 percent by the end of this fiscal year and the food inflation may reach to 12.84 percent in June 2011. Should there be a double digit inflation, this would pose a severe threat to the macro-economic stability in the country. Bangladesh has already experienced a double-digit food inflation rate on point-to-point basis since July 2007. The soaring prices of essential commodities, especially, food prices could hurt the poor and worsen equity. Persistent high inflation may unleash forces that jeopardize macroeconomic stability and economic growth. Last year, the International Monetary Fund (IMF) also warned Bangladesh that excess liquidity and resurgent international

commodity and food prices might push inflation to double-digit levels by year-end (The Daily Star, 30 October 2009). Food inflation leaves a harmful impact on the purchasing power when the per capita GDP does not correspond with inflation. From August 2009 to June 2010, the food inflation has risen by 5.7 percent whereas GDP growth rate has fallen by 0.1 percent, indicating that the purchasing power of the people shrunk drastically.

The overall food price situation in the country has raised serious concerns. Prices of essential food commodities particularly, rice has shot up even after good harvest of Boro crop. The retail prices of food grain in the local market have increased significantly in the recent months and likely to increase further until the next harvest. Prices of other essential food commodities like wheat flour and rice have also gone up. The wholesale prices of both wheat and rice rise at a higher rate than those of the retail prices of both the commodities during the year 2010. During January to December 2010, the wholesale average price of rice increased by 25 percent while the wheat price has risen up by 16.67 percent. At the same time the retail prices of rice have gone up by 20 percent while the wheat prices have increased by 13.04 percent. The gap between wholesale and retail price of rice is 5 percent while for wheat it is 3.63 percent. The main reason of enormous gap between the wholesale prices and retail prices is liable to the hoarding of food grains by the wholesalers. This provides room for the wholesalers to maneuver the prices in favour of them. This maneuverability allows them to dictate retail price at the cost of the consumers.

1.1.1 Wholesale Price Situation

Between September 2009 and September 2010, the nominal rice and wheat prices increased by 63 percent and 33 percent respectively. The corresponding real prices also have risen by 53 percent and 24 percent, with a substantial rate of increase in rice prices. There is a 16.67 percent increase in wholesale rice price from January to September, 2010 in nominal terms. However, the wholesale price has risen moderately from August 2010 to December 2010. Table 1: Change of rice and wheat prices during 2008-2010

1.2 Comparison of Food Price and General Inflation

In June 2010, inflation has risen to 10.8 percent whereas the general inflation also increased to 8.7 percent. After that the food inflation decreased slightly in September 2010, but from then it has continued to rise. In January 2011, the food inflation was 11.21 percent and general inflation has risen to 8.99 percent. Table 4: Food Inflation, non Food Inflation and general Inflation

According to the twelve-month inflationary analysis, food inflation was only 5 percent in August 2009 whereas the general inflation rate was stable at 4.6 percent. However, after that the food inflation has risen at an alarming rate. This is mainly due to food and non food commodity prices have skyrocketed internationally and eventually supply shock has been created at the local market that raised the local prices. On the other hand, internal inability to monitor the market mechanism is also an important element of price hike (Table 4). Table 5: Percentage change in food and general inflation

Comparative analysis between percentage change in food prices and general prices levels says that from January 2010 to March 2010 the food prices shot up by 2.7 percent while the general price decreased by 0.1 percent. During April 2010 to June 2010, the food prices increased by 0.1 percent while the general price level decreased by 0.2 percent. From September 2010 to January 2011, the food prices have risen up by 1.63 percent which is attributed to the rise in general food price by 1.38 percent for the same period.

2. Global Food Price and Inflation in Bangladesh

During the last quarter of the year 2010, the average global food price index increased by 2.93 percent whereas the average local food price increased by 0.70 percent and the general inflation rate of Bangladesh in the last quarter increased by 0.53 percent. From the above calculation of the period of October-December 2010, it is found that if the world food price increases by 1 percent, the food price in Bangladesh increases by 0.23 percent and the general inflation by 0.18 percent. Table 6: Quarterly comparison between World food prices and Bangladesh food prices and inflation rate in 2010

So in spite of fall in international price index from Jan 2010 to June 2010, Bangladeshi local price did not fall rather it has risen at a moderate rate.

Inflation Situation of the Country Inflation in recent months and for couple of years seems to exceed the expectations. The average rate of general inflation in the present calendar year 2010 is 8.44 percent, with the non-food inflation close to 5.37 percent and food inflation 10.34 percent. Figure 2: Inflation Rate in 2010

The general inflation rate was above 8.5 percent until the middle of 2010, because both the nonfood inflation and food inflation were high (Figure 2). Non-food inflation was above 5 percent and food inflation was above 10 percent during this period. However, in July-August, the average inflation declined close to 7 percent because non-food items inflation reduced to 4.87 percent and then to 3.76 percent. Nevertheless, the general inflation tends to rise in the upcoming months because food-inflation has started to increase again. The lowest inflation was in the month of July, 2010 at 7.26 percent when both the food inflation and non-food inflation reduced. However, as international price of imported food items are increasing, general inflation may increase further as food inflation would be harder to control.

Broad Money The Broad Money Supply includes i) currency notes and coins with the public, ii) demand deposit and iii) time deposit. Table 9: Broad Money Situation

The year- on- year growth which represents the growth rate of the corresponding months compared to previous year is escalating in case of broad money (Table 9). The monthly growth

rate is also positive in recent months. That is why year-on-year growth target of reduction to 18.8 percent in June, 2010 was not achieved rather it reached to 22.4 percent. In July, 2010 the total volume of broad money was Tk. 364383.1 crore and it reached growth rate of 22.2 percent compared with that of the previous year. Since the central bank has not been able to decrease the rate of growth, it might prove to be difficult for the central bank to reach its target of 15.2 percent at the end of the current fiscal year. The remittance inflow growth is declining on a monthly basis and it is following a negative rate during April- July 2010, though in August 2010, the inflow posted a positive growth of 3.1 percent due to Eid-Ul-Fitr. But the rate is declining because of some countries banned labour exports for few years (ex: Saudi Arab, Malaysia, Kuwait), new labour markets unavailability, return of workers from abroad (e.g. Saudi Arabia, Malaysia, Libya, Oman) and thus export of workers is declining. As a consequence, the remittance inflow might decrease. The Central Bank can use this situation to reduce the liquidity but as the inflow in the last fiscal year and in this year is more than US $ 800 million per month. The demand of taka against this huge foreign currency is still large. The liquidity management is still blurred because the broad money growth is still above the target, thus the monetary policy to work properly all the tools should follow closely the target of the MPS declared by Central Bank. Otherwise, some discrepancy may arise. The rate of inflation in the upcoming months may be higher because of increase in price in international markets and the maintenance of contraction in money supply may be difficult. The central bank has to devise instruments that address the sources of the inflation (i.e. supply side). Again, the government and the central bank need to harmonies the monetary and fiscal policies to address the food import demand, rise in the rate of unemployment and loss of opportunity of employment in abroad. This implies that the government has to come up with aggregate demand management policies that raise the purchasing power while the central bank keeps the inflation at tolerable limit which does not reduce the output growth.

Recent Trade Situation The trade deficit of FY 2009-10 is 1.438 percent higher than it was in FY 2008-09, to the tune of 4174.53 crore taka. The year started with a lower trade deficit of 14 percent in July 2009 but it ended up in July 2010 with a much higher trade deficit of 25.794 percent. Therefore, basing on the log-linear trend line, the estimation of total trade deficit share is calculated till November 2010. From July to November 2010, the total estimated sum of trade deficit would be 33518.19 crore take which is 61.728 percent higher than that of the same period of 2009 (Table 10). Similarly, the estimated sum of trade for July to November 2010 would be 120345.3 crore taka which is 16.549 percent higher for the same months of 2009. Figure 3: Forecasting about Trade deficit and Total trade till November 2010

Export The monthly export share trends are shown for two consecutive fiscal years 2008-09 and 200910 (Figure 4). In FY 2008-09, the export share was 40.001 percent in July 2008 and ended up at a higher percentage of 42.87. However, in FY 2009-10, it started from 42.875 percent and ended at a lower percentage of 37.103. The polynomial trend lines are also supporting the motion trajectory of the line. The average yearly export share of the total trade has dropped during these two years. It was 38.641 percent in FY 2008-09 and dropped to 38.345 percent in FY 2009-10. This means that the total export difference was -0.296 percent of total trade which further triggered a trade deficit of 859.3146 crore taka. Figure 4: Monthly Trend of Export for Two Consecutive years.

Export in raw jute sector has fallen by 152 crore taka from 2008 to 2009. The business improved by 405 crore taka in the next two years. leather, fish and shrimp and jute (including Jute goods) industries have also made some recovery from 2009 to 2010 despite the loss during 2008 and 2009. Jute goods export has increased the most by 1308 crore taka. On the other hand, export has decreased in readymade garments, tea and fertilizer industries while news print industry made no business whatsoever. However, export in readymade garments increased by 10379 crore taka during 2008 and volume of it decreased in the next two years by 9 Crore taka, this pheonomena has created a massive impact on the growth of export was 10476 crore taka between 2008 and 2009 while it was 4650 crore taka between 2009 and 2010. In order to ensure a rapid growth in the GDP, there is a need to increase export. Figure 5: Comparative Growth of Export for Different Goods

During these two fiscal years, the import for food good items has increased from 10.218 percent to 10.875 percent. At the same time the import of capital goods has decreased from 55.619 percent in 2008-09 to 55.380 percent in FY 2009-10. This implies that in the FY 2009-10, the magnitude of import for capital good has decreased in comparison to the import of FY 2008-09 by 0.239 percent. Figure 6: Comparison between Food goods and Capital goods for two different years.

The import share for yarn, textile has decreased in FY 2009-10 compared to FY 2008-09. The decrease in import was 8.756 percent for yarn and 4.854 percent for textile. This reduction also explains negative growth of export in our readymade garment sector. The import of iron and steel has decreased by 2.748 percent in FY 2009-2010 compared to FY 2008-09 which may have a negative effect on the infrastructural development of the country. The volume of import for capital machinery has increased by 12.998 in FY 2009-10 percent from those of FY 2008-09. Figure 7: Import Composition Situation of capital Goods

Impact of the current financial crisis on developing countries:

The economic downturn in developed countries may also have significant impact on developing countries. The channels of impact on developing countries include:
Trade and trade prices: Growth in China and India has increased imports and pushed up the demand for copper, oil and other natural resources, which has led to greater exports and higher prices, including from African countries. Eventually, growth in China and India is likely to slow down, which will have knock on effects on other poorer countries. Remittances: Remittances to developing countries will decline. There will be fewer economic migrants coming to developed countries when they are in a recession, so fewer remittances and also probably lower volumes of remittances per migrant. Foreign direct investment (FDI) and equity investment: These will come under pressure. While 2007 was a record year for FDI to developing countries, equity finance is under pressure and corporate and project finance is already weakening. The proposed Xstrata takeover of a South African mining conglomerate was put on hold as the financing was harder due to the credit crunch. There are several other examples e.g. in India. Commercial lending: Banks under pressure in developed countries may not be able to lend as much as they have done in the past. Investors are, increasingly, factoring in the risk of some emerging market countries defaulting on their debt, following the financial collapse of Iceland. This would limit investment in such countries as Argentina, Iceland, Pakistan and Ukraine. Aid: Aid budgets are under pressure because of debt problems and weak fiscal positions, e.g. in the UK and other European countries and in the USA. While the promises of increased aid at the Gleneagles summit in 2005 were already off track just three years later, aid budgets are now likely to be under increased pressure. Other official flows: Capital adequacy ratios of development finance institutions will be under pressure. However these have been relatively high recently, so there is scope for taking on more risks. The list of channels above suggest that the following types of countries are most likely to be at risk (this is a selection of indicators):

 Countries with significant exports to crisis affected countries such as the USA and EU countries (either directly or indirectly). Mexico is a good example; Countries exporting products whose prices are affected or products with high income elasticities. Zambia would eventually be hit by lower copper prices, and the tourism sector in Caribbean and African countries will be hit; bonuses, Indian workers in the city of London, for example, will have less to remit. There will be fewer migrants coming into the UK and other developed countries, where attitudes might harden and job opportunities become more scarce; Countries heavily dependent on FDI, portfolio and DFI finance to address their current account problems (e.g. South Africa cannot afford to reduce its interest rate, and it has already missed some important FDI deals); Countries with sophisticated stock markets and banking sectors with weakly regulated markets for securities; Countries with a high current account deficit with pressures on exchange rates and inflation rates. South Africa cannot afford to reduce interest rates as it needs to attract investment to address its current account deficit. India has seen a devaluation as well as high inflation. Import values in other countries have already weakened the current account; Countries with high government deficits. For example, India has a weak fiscal position which means that they cannot put schemes in place; Countries dependent on aid. While the effects will vary from country to country, the economic impacts could include: Weaker export revenues; Further pressures on current accounts and balance of payment; Lower investment and growth rates; Lost employment. There could also be social effects: Lower growth translating into higher poverty; More crime, weaker health systems and even more difficulties meeting the Millennium Development Goals.

Possible policy responses

The current macro economic and social challenges posed by the global financial crisis require a much better understanding of appropriate policy responses: There needs to be a better understanding of what can provide financial stability, how crossborder cooperation can help to provide the public good of international financial rules and systems, and what the most appropriate rules are with respect to development; There needs to be an understanding of whether and how developing countries can minimise financial contagion; Developing countries will also need to manage the implications of the current economic slowdown after a period of strong and continued growth in developing countries, which has promoted interest in structural factors of growth, international macro economic management will now move up the policy agenda. Do countries have room to use fiscal and monetary polices? Developing countries need to understand the social outcomes and provide appropriate social protection schemes; There will also be implications for development policy: There will be limits to financial solutions if the problems lie in the real economy, but development finance institutions may be able to take some risks and support investment flows to developing countries, counteracting reductions in other financial flows. Whether DFIs can take higher risks might be informed by past experience, for example by looking at what happened during the Asian financial crisis of the late 1990s. During this period DFI portfolios were riskier, loan losses higher and returns lower than they are at present. And yet this poorer financial performance has not had an adverse affect on institutional credit ratings. The EBRD argued in 2007 that is able to withstand the impact of a major shock with an impact equivalent to 3.5 times the magnitude of the financial crisis in 1998, without a need to call capital; o Aid volumes will come under pressure,1 but there may also be implications for the composition of aid. Should aid be provided to countries with high risks, and how should this be channelled? Are existing IMF and World Bank schemes sufficient for this, as they already need to address balance of payment problems in countries due to high food and oil prices?

Macro-Economic Effects of the Global Financial Crisis:

_ Bangladesh is affected by the global financial crisis through the reduction of remittances, migration, readymade garments and agricultural exports (shrimp and tea). The economy is heavily dependent on migrants earnings in the Gulf countries and Western countries. Bangladesh is in the fifth position among the top remittance recipient countries in the world. The contribution of remittances more than doubled from 4% in 2001 to 10% of GDP in 2008. Exports take up 20% of the GDP. Exports of ready-made garments (RMG) represent 80% share of total exports. Almost half of the exports go to the Europe, while 25% goes to the United States. _ The volume of trade decelerated by 5.3% between July-December 2008 against an increase of 3.4% during the same period in 2007.2 A further decrease of 7.1% was observed in January 2009, compared to January 2008. Export orders of RMG fell by 5% in January and 17.6% in February 2009, with lagged effects on actual RMG exports expected 3-4 months later. Fish exports decreased by 16% on average in July- December 2008 compared to July-December 2007. Jute exports also decreased by 17% over the same period and by 19.8% in January 2009 compared to January 2008. _ Migration decreased by 40% in January-March 2009 compared to the same period in 2008. Approximately 8,000 Bangladeshi workers abroad were deported in February 2009, a near doubling compared to the previous year. _ Although remittances are still high at trend levels, there are signs of deceleration since February 2009, with a drop of remittance flows by 8.7% compared to January.

Preliminary Effects at Household Level:

_ The economic down-swing is affecting households livelihoods. Households seek additional work opportunities, mainly casual labour due to low purchasing power and reduced job opportunities. _ The proportion of job losses is estimated at 10%. On this basis, 300,000 new unemployed people have most likely been released onto the job market in the last 6 months. The livelihoods of 1.09 million individuals could be at stake, with subsequent risks to health care, food intake, education, debt and other vital services. _ Focus groups reported a significant decline in incomes, as a result of the fall in foreign currencies (dollar and pound), commodity prices, reduced casual labour opportunities and job losses in foreign countries. Women more frequently rely on remittances. Significant declines in production and prices have led to a decrease in unskilled wage rates in the fish/shrimp processing hatcheries and garment factories. The amount and frequency of remittances decreased in the last 6 months due to job cuts abroad, foreign currency depreciation and high expenses of migrants in host countries. The reported proportion of returnees is between 10-20%.

_ With the recent decline of food prices, the share of households budget spent on food has decreased to 62% in December 2008 and 57% in March 2009. However, the food budget share is still higher than in 2005 (52%). _ The share education and health expenses increased (from 6 to 7.2% and from 4.4 to 5.2%, respectively) - not only as a result of the decrease of the share of food expenditure, but also because of other costs related to education (materials and transport) and health (reduction of health services in tea estates, medicines and fees). Indebtedness remains high, absorbing 10% of households expenditure. _ Households are adopting various coping strategies. Most commonly households are reducing the number of meals and diversifying their income activities in order to bring in more revenue. Income diversification could lead to child labour or less care provided by mothers to children. Based on the discussions, the main priority needs of households are: 1) access to employment generation activities; 2) financial support; and 3) price cuts in basic needs to mitigate the cumulative impacts of the global food and financial crises.

Conditions For Sound Budget Preparation:

In addition to a multiyear perspective, sound annual budget preparation calls for making early decisions and for avoiding a number of questionable practices. 1. The need for early decisions By definition, preparing the budget entails hard choices. These can be made, at a cost, or avoided, at a far greater cost. It is important that the necessary trade-offs be made explicitly when formulating the budget. This will permit a smooth implementation of priority programs, and avoid disrupting program management during budget execution. Political considerations, the avoidance mechanisms mentioned below, and lack of needed information (notably on continuing commitments), often lead to postponing these hard choices until budget execution. The postponement makes the choices harder, not easier, and the consequence is a less efficient budget process. When revenues are overestimated and the impact of continuing commitments is underestimated, sharp cuts must be made in expenditure when executing the budget. Overestimation of revenue can come from technical factors (such as a bad appraisal of the impact of a change in tax policy or of increased tax expenditures), but often also from the desire of ministries to include or maintain in the budget an excessive number of programs, while downplaying difficulties in financing them. Similarly, while underestimation of expenditures can

come from unrealistic assessments of the cost of unfunded liabilities (e.g. benefits granted outside the budget) or the impact of permanent obligations, it can also be a deliberate tactic to launch new programs, with the intention of requesting increased appropriations during budget execution. It is important not to assume that technical improvements can by themselves resolve institutional problems of this nature. An overoptimistic budget leads to accumulation of payment arrears and muddles rules for compliance. Clear signals on the amount of expenditure compatible with financial constraints should be given to spending agencies at the start of the budget preparation process. As will be stressed repeatedly in this volume, it is possible to execute badly a realistic budget, but impossible to execute well an unrealistic budget. There are no satisfactory mechanisms to correct the effects of an unrealistic budget during budget execution. Thus, across-the-board appropriation sequestering leads to inefficiently dispersing scarce resources among an excessive number of activities. Selective cash rationing politicizes budget execution, and often substitutes supplier priorities for program priorities. Selective appropriation sequestering combined with a mechanism to regulate commitments partly avoids these problems, but still creates difficulties, since spending agencies lack predictability and time to adjust their programs and their commitments. An initially higher, but more realistic, fiscal deficit target is far preferable to an optimistic target based on overestimated revenues, or underestimated existing expenditure commitments, which will lead to payment delays and arrears. The monetary impact is similar, but arrears create their own inefficiencies and destroy government credibility as well. To alleviate problems generated by overoptimistic budgets, it is often suggested that a core program within the budget be isolated and higher priority given to this program during budget implementation. In times of high uncertainty of available resources (e.g., very high inflation), this approach could possibly be considered as a second best response to the situation. However, it has little to recommend it as general practice, and is vastly inferior to the obvious alternative of a realistic budget to begin with. When applied to current expenditures, the core program typically includes personnel expenditures, while the noncore program includes a percentage of goods and services. Cuts in the noncore program during budget execution would tend to increase inefficiency, and reduce further the meager operations and maintenance budget in most developing countries. The core/noncore approach is ineffective also when applied to investment expenditures, since it is difficult to halt a project that is already launched, even when it is non-core. Indeed, depending on strong political support, noncore projects may in practice chase out core projects.

2. The need for a hard constraint Giving a hard constraint to line ministries from the beginning of budget preparation favors a shift from a needs mentality to an availability mentality. As discussed in detail later in this chapter, annual budget preparation must be framed within a sound macroeconomic framework, and should be organized along the following lines:

 A top-down approach, consisting of: (i) defining aggregate resources available for public spending; (ii) establishing sectoral spending limits that fits government priorities; and (iii) making these spending limits known to line ministries; A bottom-up approach, consisting of formulating and costing sectoral spending programs within the sectoral spending limits; and Iteration and reconciliation mechanisms, to produce a constant overall expenditure program. Although the process must be tailored to each country, it is generally desirable to start with the top-down approach. Implementation of this approach is always necessary for good budgeting, regardless of the time period covered.

3. Avoiding questionable budgeting practices Certain budgetary practices are widespread but inconsistent with sound budgeting. The main ones are: incremental budgeting, open-ended processes, excessive bargaining, and dual budgeting. a. Incremental budgeting Life itself is incremental. And so, in part, is the budget process, since it has to take into account the current context, continuing policies, and ongoing programs. Except when a major shock is required, most structural measures can be implemented only progressively. Carrying out every year a zero-based budgeting exercise covering all programs would be an expensive illusion. At the other extreme, however, incremental budgeting, understood as a mechanical set of changes in a detailed line-item budget, leads to very poor results. The dialogue between the Ministry of Finance and line ministries is confined to reviewing the different items and to bargaining cuts or increases, item by item. Discussions focus solely on inputs, without any reference to results, between a Ministry of Finance typically uninformed about sectoral realities and a sector ministry in a negotiating mode. Worse, the negotiation is seen as a zero-sum game, and usually not approached by either party in good faith. Moreover, incremental budgeting of this sort is not even a good tool for expenditure control, although this was the initial aim of this approach. Line-item incremental budgeting focuses generally on goods and services expenditures, whereas the budget busters are normally entitlements, subsidies, hiring or wage policy or, in many developing countries, expenditure financed with counterpart funds from foreign aid. Even the most mechanical and inefficient forms of incremental budgeting, however, are not quite as bad as capricious large swings in budget allocations in response to purely political power shifts. b. Open-ended processes

An open-ended budget preparation process starts from requests made by spending agencies without clear indications of financial constraints. Since these requests express only needs, in the aggregate they invariably exceed the available resources. Spending agencies have no incentive to propose savings, since they have no guarantee that any such savings will give them additional financial room to undertake new activities. New programs are included pell-mell in sectoral budget requests as bargaining chips. Lacking information on the relative merits of proposed expenditures, the Ministry of Finance is led to making arbitrary cuts across the board among sector budget proposals, usually at the last minute when finalizing the budget. At best, a few days before the deadline for presenting the draft budget to the Cabinet, the Ministry of Finance gives firm directives to line ministries, which then redraft their requests hastily, themselves making cuts across the board in the programs of their subordinate agencies. Of course, these cuts are also arbitrary, since the ministries have not had enough time to reconsider their previous budget requests. Further bargaining then taxes place during the review of the budget at the cabinet level, or even during budget execution. Open ended processes are sometimes justified as a decentralized approach to budgeting. Actually, they are the very opposite. Since the total demand by the line ministries is inevitably in excess of available resources, the Ministry of Finance in fact has the last word in deciding where increments should be allocated and whether reallocations should be made. The less constrained the process, the greater is the excess of aggregate ministries request over available resources, the stronger the role of the central Ministry of Finance in deciding the composition of sectoral programs, and the more illusory the ownership of the budget by line ministries. c. Excessive bargaining and conflict avoidance There is always an element of bargaining in any budget preparation, as choices must be made among conflicting interests. An apolitical budget process is an oxymoron. However, when bargaining drives the process, the only predictable result is inefficiency of resource allocation. Choices are based more on the political power of the different actors than on facts, integrity, or results. Instead of transparent budget appropriations, false compromises are reached, such as increased tax expenditures, creation of earmarked funds, loans, or increased contingent liabilities. A budget preparation process dominated by bargaining can also favor the emergence of escape mechanisms and a shift of key programs outside the budget.7 A variety of undesirable compromises are used to avoid internal bureaucratic conflictsspreading scarce funds among an excessive number of programs in an effort to satisfy everybody, deliberately overestimating revenues, underestimating continuing commitments, postponing hard choices until budget execution, inflating expenditures in the second year of a multiyear expenditure program, etc. These conflict-avoidance mechanisms are frequent in countries with weak cohesion within the government. Consequently, improved processes of policy formulation can have benefits for budget preparation as well, through the greater cohesion generated in the government. Conflict avoidance may characterize not only the relationships between the Ministry of Finance and line ministries, but also those between line ministries and their subordinate agencies. Indeed, poor cohesion within line ministries is often used by the Ministry of Finance as a justification for its leading role in determining the composition

of sectoral programs. Perversely, therefore, the all-around bad habits generated by open-ended budget preparation processes may reduce the incentive of the Ministry of Finance itself to push for real improvements in the system. d. Dual budgeting There is frequent confusion between the separate presentation of current and investment budgets, and the issue of the process by which those two budgets are prepared. The term dual budgeting is often used to refer to either the first or the second issue. However, as discussed earlier, a separate presentation is needed. Dual budgeting refers therefore only to a dual process of budget preparation, whereby the responsibility for preparing the investment or development budget is assigned to an entity different from the entity that prepares the current budget. "Dual budgeting" was aimed initially at establishing appropriate mechanisms for giving higher priority to development activity. Alternatively, it was seen as the application of a "golden rule" which would require balancing the recurrent budget and borrowing only for investment. In many developing countries, the organizational arrangements that existed before the advent of the PIP approach in the 1980s (see chapter 12) typically included a separation of budget responsibilities between the key core ministries. The Ministry of Finance was responsible for preparing the recurrent budget; the Ministry of Planning was responsible for the annual development budget and for medium-term planning. The two entities carried out their responsibilities separately on the basis of different criteria, different staff, different bureaucratic dynamics, and, usually, different ideologies. In some cases, at the end of the budget preparation cycle, the Ministry of Finance would simply collate the two budgets into a single document that made up the budget. Clearly, such a practice impedes the integrated review of current and investment expenditures that is necessary in any good budget process. (For example, the Ministry of Education will program separately its school construction program and its running costs and try to get the maximum resources for both, while not considering variants that would consist of building fewer schools and buying more books.) In many cases, coordination between the preparation of the recurrent budget and the development budget is poor not only between core ministries but within the line ministries as well.

Future Plan & Needed Steps:

Controlling of money supply and printing; In the last two years supply flow was much higher than usual; Private banks must control their loans; Government borrowing from commercial banks; Bangladesh should follow China and India in monetary policy strategy, which revised interest rates 12 times in the last 18 months; Bank of China revised two types of loan interests nine times; Government has to increase purchasing power of general people; Giving sufficient privileges to farmers to motivate them; Regaining the confidence of businessmen by taking rehabilitation project and other initiatives for micro businessmen; Ensuring the supply of food; Rejecting the restriction on news media; Ejecting the forbiddance on politics; Shutting off the tendency of taking financial assistance of donor agencies; The economy is just starting to feel the impact of the ongoing financial crisis and significant downside risks exist in the coming months. Projections by international financial organisations converge on the fact that GDP growth will be lower (ranging from 4.5 to 6.0%) than the 6.5% initially projected for the fiscal year (July 2010-June 2011). Against the backdrop of the deceleration of export growth and remittances, foreign reserves will contract and could consequently weaken the food import capacity of the country and depreciate the exchange rate of the Taka against major currencies. Currency depreciation could lead to some losses of real income and purchasing power through inflation driven by imported goods. An expected increase in government spending for rescue packages (including tax breaks, cash subsidies and food rationing programs) could lead to monetary financing of increased fiscal deficits beyond the 4.99% target, fuelling inflation. The current estimate of about 0.3 million job losses in the last 6 months could double in the coming months as a result of increased lay-offs in export-led sectors and a further contraction of migration. As households expenditures are not back to their 2005, there are serious concerns about health care, food intake, education, debt and other vital services and their implications in terms of food security and nutrition.

Focus group discussions revealed a bleak perception of the evolution of the situation Households expected that it will take 1 to 2 years to recuperate their income level of 6 months ago. Such a pessimistic outlook is due to the long lasting impact of combined shocks endured since 2007.

Findings and conclusion: Findings of the study:

The intension of this study is to know how insurance business operates in our country. The major findings of the overall study are discussed below: _ Importance of economic condition in the economy. _ How to affect our total economic growth.