Att: (1)
DOCUMENT
OF INTERNATIONAL MONETARY AND NOT FOR PUBLIC USE
FUND
EBS/85/62 CONFIDENTIAL
March
15,
To:
Members
From:
The Secretary
Subject:
Bangladesh - Use of Fund Resources - Compensatory Financing Facilitv - Fluctuations in the Cost of Cereal Imports
of
the
Executive
Board
Attached for consideration by the Executive Directors paper on a request expected to be received from Bangladesh for equivalent to SDR 54.95 million under the compensatory financing A draft decision appears on page 17.
a date
This subject to be announced.
If Executive relating to this paper Pk. Kaibni (ext. 7721).
Att:
(1)
will
be brought
Directors prior to
1985
to
the
agenda
have technical or the Board discussion,
for
factual they
is a a purchase facility.
discussion
on
questions should contact
CONFIDENTIAL
INTERNATIONAL MONETARYFUND BANGLADESH Facility-Use of Fund Resources-- Compensatory Financing Fluctuations in the Cost of Cereal Imports Prepared
by the Research
(Ln consultation
Department
and the Asian
with the Exchange and Trade and Treasurer's Departments) Approved
Department
Relations,
Legal,
by Wm. C. Hood and Tun Thin March
14,
1985
The Managing Director has been informed that the authorities of Bangladesh will shortly request a purchase of SDR 54.95 million (equivalent to 19.1 percent of quota) under the Decision on Compensatory Financing of Fluctuations in the Cost of Cereal Imports (Decision The expected request No. 6860-(81/81), adopted May 13, 1981, as amended). is in respect of a net shortfall of SDR 108.2 million for the year ended December 1984, consisting of an excess of SDR 139.7 million in the cost of cereal imports that is partly offset by an excess of SDR 31.5 million in merchandise exports. the proposed purchase would raise If approved, outstanding purchases relating to the cereals component to SDR 77.35 million (26.9 percent of quota) and total purchases outstanding under Decisions No. 6224 and No. 6860 together to SDR 143.75 million (50 percent of quota). i/ It would also raise Fund holdings of the member's currency from 217.4 percent of quota to 236.5 percent of quota. A waiver of the limitation of Article V, Section 3(b)(iii) of the Fund's Articles of Agreement will be required and is being proposed. This paper, which is being circulated in advance of request by Bangladesh, is presented in four sections and sections deal with: (I) balance of payments position and the Fund; (2) determination of the amount of compensation; the excess in the cost of cereal imports and the shortfall exports; and (4) staff appraisal and proposed decision. of Bangladesh with the Fund are summarized in the annex.
the formal The an annex. cooperation with (3) causes of in merchandise The relations
purchases of SDR 88.8 million in respect -11 Bangladesh has outstanding of two previous compensatory financing purchases. An early drawing of SDR 60 million was made on February 17, 1982 under Decision No. 6224, of which SDR 23.1 million was repurchased on August 13, 1982 under paragraph 7 of that decision. Another early drawing of SDR 71.2 million was made on August 30, 1982, under Decision No. 6860, consisting of SDR 37.6 million in relation to an export shortfall and of SDR 33.6 million in relation to an excess in cereal imports. A repurchase of SDR 19.3 million was made on March 14, 1983 of which SDR 8.1 million was in relation to the export component and SDR 11.2 million was in relation to the cereal component.
-2-
1.
Balance a.
of payments
Balance
position
of payments
and cooperation
with
the Fund
position
After two successive years of strong improvements, the overall balance of payments position of Bangladesh has come under considerable strains in 1984/85. These strains originated mainly from the adverse effects of drought in the latter part of 1983/84 and severe floods in the early part of 1984185 on domestic foodgrain production. In order to meet consumption requirements, commercial imports of cereals more than tripled. In addition, because of reduced demand for Bangladesh workers abroad, mainly in the Middle East, workers' remittances have declined sharply. Consequently, the balance of payments position is expected to record a large deficit that will result in a sharp drawdown in gross international reserves. In 1983/84, the overall balance of payments of Bangladesh recorded a surplus of SDR 250 million (Table 1). Export receipts rose by nearly 25 percent mainly because of higher prices for traditional exports of raw jute and jute goods. Concurrently, import payments rose by 8 percent, These developments, together involving only a modest increase in volume. with sharply reduced net payments on services resulting from higher interest earnings on international reserves and a continued high level of workers' remittances, caused a reduction in the current account deficit from SDR 966 million (8.5 percent of GDP) in 1982/83 to SDR 890 million (7.4 percent of GDP) in 1983/84. Although aid disbursements declined somewhat, the net capital account was more than sufficient to cover the current account deficit, resulting in an overall surplus and a significant increase in gross international reserves. At the end of 1983184, gross international reserves stood at about SDR 500 million, equivalent to 2.6 months of imports, and the unused balances in the foreign currency accounts more than doubled to SDR 136 million. has deteriorated As noted above, the balance of payments position in 1984185. Despite a substantial improvement in export prices, the value of exports is forecast to grow by only 10 percent because of sharply reduced volumes caused by the impact of the floods on jute production and exports. At the same time, the value of imports is forecast to rise by nearly 23 percent, mainly because of higher commercial imports of cereals necessitated by the shortfall in domestic foodgrain production. Commercial cereal imports are expected to rise from about SDR 92 million in 1983/84 to about SDR 277 million in 1984/85, accounting for about 10 percent of total projected imports. The deterioration in the trade balance is expected to be compounded by an increase in net payment on services and a 23 percent decline in workers' remittances. Consequently, the current account deficit is forecast to rise from SDR 0.9 billion in 1983/84 to SDR 1.5 billion in 1984/85, equivalent to 10.6 percent of projected GDP. Although net capital inflows are expected to increase by about 23 percent because of substantial commercial borrowings for food an overall balance of payments imports and increased aid disbursements,
-3-
Table
1.
Bangladesh: (In
Balance
of Payments,
millions
of SDRs)
1980181 A.
B.
Current account -1,192 Trade balance -1,533 Export, f.o.b. 615 Imports, c.i.f. -2,148 Services, net 10 Receipts 238 Payments -228 Of which: Interest (-65) Private transfers 331 Capital account, net Offical transfers Aid disbursements Food Commodity Project Food loans, net Borrowings Repayments Other medium- and long-term loans Loans Amortization Trust Fund, net Short-term loans, net Other (including valuation adjustment and errors and omissions)
C.
SDR allocation
D.
Overall
E.
Financing (increase in assets -) Use of Fund resources. net Change in other reserve-related items
balance
(A+B+C)
103 ... 995 (168) (341) (486) -30 (--I (-30) -31 g;;, (7) 13
1980/81-1984/85
Years Ending June 1981182 1982183
1983184
Prel. Est. 1984185
-1,236 -1,523 507 -2,030 -53 201 -254 (-97) 340
-890 -1,W 783 -2,230 -27 276 -303 (-106) 584
-1,530 -1,840 860 2,750 -92 300 -393 (-136) 452 1,400 31 1,300 (250) (460) (590) 143 (180) (-37)
-966
-1,445 628 -2,073 -105 212 -317 (-118) 584
994 ... 1,001 (187) (341) (473)
1,281 ... 1,304 (235) (480) (589)
1,140 4 1,208 (264) (418) (526)
(2, C-32)
$1 C-9)
(ii, (-57)
-32 (...1 (-32) (--I 39
-89 (--I C-88)
-66 (8) l-66) C-8) -10
C-1)
-33
-80 (10) (-75) (-15) -40
66
-7
55
11
--
-17
--
--
--
--
-242
315
250
-170
-315
-250
170
19
-11
-162 162 143
242
19
206
36
45 -360
-269
181
Memorandum items: Gross international reserves (end-ofperiod) In months of imports, c.i.f. Sources:
Data provided
217
112
335
499
335
1.2
0.6
1.9
2.6
1.5
by the Bangladesh
authorities;
and staff
estimates.
-4-
deficit of SDR 170 million is forecast. This deficit is expected to be financed by a drawdown in gross international reserves; taking into account the proposed purchase under the CFF, net use of Fund resources will be a negative SDR 11 million. Bangladesh's gross international reserves, which stood at SDR 500 milLion at the end of June 1984 fell to SDR 450 million at end-January 1985 and are projected to fall to SDR 335 million by the end of June 1985. At reserves would be equivalent to 1.5 months of 1984/85 imports, that level, a sharply lower import coverage than the 2.6 months provided by reserves held a year earlier. b.
Cooperation
with
the Fund
During Bangladesh has a good record of cooperation with the Fund. 1982183 Bangladesh adopted an economic program supported by a stand-by All perforarrangement from the Fund in the amount of SDR 68.4 million. mance criteria under that arrangement were met and all scheduled purchases the staff report for the 1984 Article IV consulwere made. In discussing tation last July, Executive Directors noted with satisfaction that The economic Bangladesh's overall economic performance was favorable. situation has since deteriorated significantly as a result of severe which caused substantial damage to foodgrain production, thus floods, and an unanticipated decline in necessitating additional food imports, A sharp increase in domestic credit and the impoworkers' remittances. sition last July of a 10 percent ceiling on the premium in the secondary foreign exchange market may have also contributed to the worsening of Bangladesh's external position. The authorities have been extremely concerned about the deterioration in the country's economic situation and have implemented some corrective measures aimed principally at containing credit growth and liberalising the operations of the secondary foreign exchange market. These measures, which were broadly appropriate, included: a 2 percentage point increase in interest rates on advances against fixed-term deposits and financial paper securities to 18 percent and 20 percent, respectively; an increase from 16 percent to 18 percent in interest rates on trading credits; an increase in the Bangladesh Bank rate from 10.5 percent to 11.0 percent; a temporary moratorium on rediscounting by Bangladesh Bank with certain and imposition of ceilings on advances by banks in order to exceptions; limit domestic credit expansion during the current fiscal year to the ceiling on the premium in approximately 18 percent. In addition, the secondary foreign exchange market was raised to 12 percent on November 1, 1984. Subsequently, it was decided to adjust the premium from time to time in light of prevailing conditions; on January 4, 1985 the electricity tariff In addition, the premium was set at 14 percent. was raised by 3.5 percent in December 1984, and in January 1985 fertiliser prices were raised by 7 percent on average.
-5-
Bangladesh maintains multiple currency practices and an exchange At the conclusion of the restriction that are not approved by the Fund. 1984 Article IV consultation with Bangladesh the Executive Board encouraged Bangladesh to eliminate these restrictive practices. The authorities have pursued a flexible exchange rate policy in recent years which should provide a basis for further liberalization of the external The authorities have also including these restrictive practices. sector, expressed their commitment to further liberalization of the import regime. The Bangladesh authorities have remained in close contact with the staff and are currently considering the implementation of more comprehensive measures to improve the country's balance of payments position. The staff mission, which is expected to visit Bangladesh in the second half of March to conduct the Article IV consultation, will assist the The authorities in the formulation of the required adjustment measures. staff considers that the requirement of cooperation associated with the proposed use of Fund resources under the CFF has been met by the implementation of the above measures, and by the expressed desire of the authorities to continue cooperating with the Fund in an effort to find appropriate solutions to the country's balance of payments difficulties. 2.
Determination
of the amount of compensation
The latest actual data on cereal imports and on merchandise exports are available through December 1984, and the authorities of Bangladesh have requested that the calendar year 1984 be treated as the shortfall year. 1/ Executive Board Decision No. 6860 provides that the amount of compensation be calculated as the sum of the excess in the cost of cereal imports and the shortfall in merchandise exports, subject to quota limits. 11 Concerning the last two purchases made by Bangladesh, ex-post calculations based on actual data for the related five-year trend periods indicate that the export shortfalls supporting the two purchases were underestimated. For the first purchase (SDR 36.9 million in February 1982), the shortfall based on actual data amounts to SDR 82.4 million, With compared with a shortfall of SDR 36.9 million calculated earlier. perfect foresight, Bangladesh's first purchase would have amounted to SDK 82.4 million (instead of SDR 36.9 million). For the second purchase consisting of SDR 29.5 million in relation to merchan(SDR 51.9 million, dise exports and of SDR 22.4 million in relation to cereal imports) use of actual data provides an export shortfall of SDR 86.2 million, compared with the shortfall of 29.5 million calculated earlier, and a shortfall, rather than an excess, in cereal imports. With perfect foresight, Bangladesh would not have opted for a purchase under the cereal decision. Its second purchase, which would have been based on the export shortfall of SDR 86.2 million, would have amounted to SDR 45.0 million, after reducing the shortfall by SDR 41.2 million in order to avoid double compensation; since the shortfall year for the first purchase overlaps the shortfall year for the second purchase by six months, double compensation is avoided by subtracting half of the first purchase (41.2 = 1/2x82.4) from the shortfall of SDR 86.2 million related to the second purchase.
-6-
For the calendar year 1984, the net shortfall, defined as the sum of the export shortfall and the excess of cereal imports, is estimated at SDR 108.2 million. This amount represents an excess of SDR 139.7 million in the cost of cereal imports that is partly offset by an excess of Consequently, the SDR 31.5 million in merchandise exports (Table 2). which is roughly half the amount proposed purchase of SDR 54.95 million, of the net shortfall, is entirely in respect of the excess in the cost of cereal imports. Table
Bangladesh:
2.
Determination (In
millions
of the Amount of Compensation of SDRs)
Calendar 1982 1.
Commercial
2.
Merchandise
3.
Net shortfall = (3.1) + (3.2) 3.1 Excess in cereal imports Export shortfall 3.2
4.
Proposed -l/
cereal
imports
exports
104.0
75.8
266.6
106.4
81.5
553.6
653.5
780.7
877.5
952.2
108.2 139.7 -31.5 54.95
purchase
Based on judgmental a.
1983
Cereal
import
Years Forecast l/ 1984 1985 1986
forecasts
(Tables
3 and 5).
excess
cereal imports by Bangladesh In calendar year 1984, commercial nearly three times the average value of amounted to SDR 266.6 million, The value of commercial cereal such imports in the two preceding years. imports is expected to decline to an average of SDR 94.0 million in the for calendar year two following years, and the excess in cereal imports The excess is about 1984 is estimated at SDR 139.7 million (Table 3). evenly divided between wheat (excess of SDR 71.2 million) and rice (excess of SDR 68.5 million). b.
Export
shortfall
Merchandise exports of SDR 780.7 million for calendar year 1984 were 30 percent larger than average exports in the two preceding years. Earnings in 1985 and 1986 are projected to grow at an average annual rate of about These movements result in an excess of SDR 31.5 million in 11 percent. merchandise exports for calendar year 1984.
-7-
Table
3.
Bangladesh: Cereal Imports and Excess Major Commodities, 1980-86 Calendar
1980
1981
1982
Total Rice Wheat
91.2 -91.2
-z --
-104.0 67.7 36.3
Years
1983 (In
1984 millions
-75.8 7.7 68.1
3.
-= --
-100 -100
-----
-27 -m 87
Causes of the excess in cereal imports the shortfall in merchandise extorts a.
Cereal
Projected 1985 1986
Arithmetic Excess
of SDRs)
-266.6 117.1 149.5
(Percentage Total Rice Wheat
by
-106.4 30.4 76.0
-81.5 19.8 61.7
139.7 68.5 71.2
changes)
252 1,420 120
-60 -XT -49
-23 -35 -19
and
imports
The economy of Bangladesh is predominantly agricultural with about 80 percent of the cultivated land devoted to rice; wheat has recently Progress has been made overtaken jute as the second most important crop. toward the goal of self-sufficiency in foodgrains, with total imports including food aid in recent years accounting for an average of only about 10 percent of annual supplies compared with over 20 percent in the late When crops are adversely affected by unfavorable 1960s and early 1970s. weather, food aid generally does not rise sufficiently to cover the which are mostly met by cereal imports on commercial additional deficits, Wheat is often imported when rice is in short supply because its terms. price is lower than that of rice. The Government administers a foodgrain procurement and distribution system that is designed to assure adequate food supplies to the population About 90 percent of the and to provide a minimum price to the producers. Government's foodgrain supplies are acquired through imports, mostly under food aid, but commercial imports can be large in years of unusual The remaining 10 percent of government supplies is purchased from. need. these purchases account for only about 3 percent domestic producers; while the remainder is sold by of total domestic foodgrain production, The role of the government foodgrain producers on the free market. program is particularly important in years of serious damage to the crops,
-8-
In such circumstances, as occurred in 1984. sufficient supplies to enable it to respond particularly sudden shortages of foodgrains, segments of the population.
the Government must secure quickly in order to meet to the most vulnerable
Bangladesh harvests three crops of rice each year: the aman crop, which represents about one half of total rice production, is harvested in November/December; the boro crop, harvested in May/June, and the aus each account for about one fourth crop, harvested in August/September, There is only one crop of wheat a year, which of total rice production. Wheat is planted exclusively on high ground, is harvested in April/May. whereas rice is planted both on high ground and low lands. Rice grown for rice grown on low lands is susceptible to flood damage, while yields on high ground usually benefit from the additional rainfall. After growing at an average annual rate of almost 4 percent per year from 1978179 (July/June) to 1982183, total foodgrain production in Bangladesh increased by only 2 percent in 1983184, which was below the estimated population growth rate of about 3 percent per year. Lower foodgrain import arrivals during 1983, combined with larger releases from government stocks associated with flood losses to the aman crop in late 1983, resulted in total government foodgrain stocks declining by the end of 1983 to their lowest levels since 1979. In 1984, drought in the spring and a series of floods from May to September caused heavy damage to the boro and aus crops; losses to each crop are estimated at over 300 thousand tons, or somewhat more than 10 percent of usual output. In addition, flood losses to the aman crop in late 1984 are estimated at about 850 thousand tons, bringing total loss of rice output in 1984 to about 1.5 million tons. These losses were comparable to losses experienced in 1974, when the Government was less well prepared to deal with large shortages and famine spread in areas affected by the floods. Although current estimates indicate that the flood losses in 1984 were eventually offset by larger production of rice grown on high ground, particularly from the aman crop harvested at the end of 1984, serious food shortages emerged ine flooded areas. Output of wheat was not adversely affected and in fact was larger in 1984 than in 1983. -l/ l/ Cereal production data in Bangladesh are available only on a cropyear basis (July/June). In spite of the substantial flood losses that caused supply shortages in calendar year 1984, it is estimated that total cereal production for 1984/85 will be slightly larger than in the previous year. The main reason for this increase, in addition to a larger wheat crop, was the larger-than-expected aman harvest at the end of 1984 which resulted from improved yields. Thmarger production at the end of 1984, together with the continued import arrivals through the first quarter of 1985, are expected to ease the supply sFtuation considerably by the second quarter of 1985.
-9-
The Government responded quickly by releasing a significantly larger amount of foodgrains from government stocks than in past years; from July to December 1984 those releases amounted to 1.5 million tons, more These than double the amount released in the same period in 1983. releases were necessary because large segments of the population living in the flooded areas did not have the income with which to purchase grains on the open market; although increased production of rice grown on high ground eventually offset the flood losses, there were the usual difficulties in transporting grain from surplus to deficit areas in In spite of the government releases, domestic rice times of flood. prices increased by 24 percent in the last half of 1984. Food aid increased only by a modest amount in 1984, and the Government supplemented supply through large imports on commercial terms. Commercial rice imports rose to 477 thousand tons in 1984 from an average of 160 thousand tons in 1982-83, and commercial wheat imports rose to 956 thousand tons from an average of 362 thousand tons in 1982-83 imports of cereals increased from (Table 4). In value terms, commercial an average of SDR 89.9 million for 1982-83 to SDR 266.6 million in 1984. Table
4.
Bangladesh: Estimation Volume, and Unit Value (1984 = 100:
Value Share in Total Cereal in 1984 (In percent) 1980
In terms
of SDRs)
Calendar 1981
Value,
Years
1982
1983
1984
Projected 1985 1986
Excess in Percent of Level in Excess Year
-34 -61
-----
39 58 24
28 7 46
100 100 100
40 26 51
31 17 41
52.4 58.5 47.6
Volume Rice Wheat
42 -61
----
38 61 27
35 6 49
100 100 100
42 26 50
31 16 39
50.7 58.2 47.0
Unit value Rice Wheat
55 97
-----
92 95 90
98 105 93
100 100 100
101 99 102
106 107 105
0.4 -1.1 1.7
Value Rice Wheat
l
of the Excess in Cereal Imports by Major Commodities, 1980-86
100.0 43.8 56.2
commercial rice imports are expected Assuming a return to normal weather, to decline to 125 thousand tons in 1985 and 75 thousand tons in 1986. World rice prices are projected to decline in 1985 by about 3 percent, and to rise
- 10 -
by 8 percent in 1986. As a result of these movements, the value of rice imports is expected to decline from SDR 117 million in 1984 to SDR 30.4 million in 1985 and SDR 19.8 million in 1986. An excess of SDR 68.5 million is estimated for rice. The volume of commercial wheat imports is expected to decline to 475 thousand tons in 1985 and 375 thousand tons in 1986. These volume levels, which are still high by historical standards, are expected to be necessary in view of population growth and in order to maintain stocks at adequate levels. These projections assume slight increases in domestic wheat production, and food aid remaining constant at about the 1984 level. World wheat prices in 1985 are projected to remain at 1984 levels and to The cost of commercial wheat imports, increase by 3 percent in 1986. therefore, is expected to decline from SDR 149.5 million in 1984 to SDR 76.0 million in 1985 and to SDR 61.7 million in 1986. An excess of SDR 71.2 million is estimated for wheat. b.
Merchandise
extorts
Relatively strong growth of exports of 19 percent in the shortfall year resulted in an estimated excess of SDR 31.5 million (Table 5). outcome is largely explained by developments in jute exports. (1)
This
Jute exports
which accounted for 65 percent of total exports Jute exports, in the shortfall year, consist of raw jute (17 percent) and jute goods (48 percent). They increased by 17 percent in the shortfall year, following a similar increase in 1983. A sharp slowdown to an average of about 3 percent a year is projected for the two post-shortfall years. An excess of SDR 38.0 million is estimated for jute exports in calendar year 1984. The primary uses of raw jute are in the manu(a) Raw jute. facture of packaging materials and for carpet backing. Bangladesh accounts for 30 percent of world production of raw jute and about 80 percent of world exports. The markets for raw jute have been declining or stagnant since the 1960s because of competition of synthetic substitutes (primarily polypropylene), which was accompanied by a decline in spinning capacity in the industrial countries and increased processing of jute in Jute prices have experienced a long-term jute-producing countries. downward trend which has been interspersed with brief periods of high prices. Low prices in the late 1970s and early 1980s resulted in declining jute output in the major producing countries. As a result, world jute production was less than consumption each year from 1980 through 1983. As world stocks diminished, prices began to increase in the last half of 1983. They then increased sharply from an average of US$411 per ton in the first half of 1984 to US$1,019 by year-end when unfavorable weather resulted in a sharp reduction of the jute harvest in Bangladesh. World
Table
5.
Bangladesh:
Export
Earnings
and Shortfalls
Calendar 1980
1981
1982 (In
Total Jute Raw jute Jute goods Non-jute Leather Tea Marine products Others Garments
--578.3 --444.3 103.8 340.5 --134.0 45.1 34.1 25.1 29.7 (0.9)
512.6 385.9 79.6 306.3 126.7 46.9 29.9 28.2 21.7 (3.7)
-553.6 -368.6 91.2 277.4 -185.0 48.9 34.8 53.5 47.8 (7.4)
-11 -n -77 -10
8 -z 15 -9
3 -12 12 -27 (311)
% 16 90 120 (100)
Commodities,
Years Projected 1985 1986
1983
1984
millions
of SDRs)
-653.5 P432.7 104.9 327.8 P220.8 66.7 45.1 61.9 47.1 (15.9) (Percentage
Total Jute Raw jute Jute goods Non-jute Leather Tea Marine products Others Garments
by Major
18 17 15 18 19 36 30 16 ,1;',,
-780.7 -505.7 128.3 377.4 -275.0 63.3 64.5 68.5 78.7 (56.6)
-877.5 -510.8 133.8 377.0 -366.7 81.9 71.9 77.2 135.7 (90.0)
952.2 543.4 147.5 395.9 408.8 101.9 71.4 86.2 149.3 (98.0)
changes) 19 17 22 15 25 -5 43 11
12 -i T 33 29 12 13 (75:)
9 z 10 5 ii -1 12 10 (9)
1980-86
Shortfall ArithGeometric metic
-31.5 -37.9 -8.9 -29.2 3.8 7.0 -9.2 0.0 (-2,'::)
-17.1 -33.4 -7.1 -26.3 16.2 9.2 -6.9 0.9 13.0 (-3.0)
I I
- 12 -
prices for 1984 as a whole were 96 percent higher than the average prices of the two preshortfall years, but average unit values for Bangladesh were only 44 percent higher because of forward contract sales and a lower volume in the last half of the year when prices were much higher. In Bangladesh, jute is planted June through August. Planting the affected by drought and harvesting result, production was reduced by raw jute exports fell by 20 percent decline in export volume, earnings because of the increase in export
in the spring and harvested during spring 1984 crop was adversely was affected by severe floods. As a about 18 percent, and the volume of (Table 6). In spite of the sharp increased by 22 percent in 1984 unit values.
Assuming a recovery in world production of crops to be harvested after mid-1985, jute prices are expected to remain high in the first half of 1985 and then decline somewhat toward the end of the year. The decline will be limited, however, because of the need to replenish world and by the constraint on planted acreage in Bangladesh due to stocks, seed shortages. Since Bangladesh sells its raw jute under forward contracts several months in advance, the unit value of its raw jute exports in 1985 is expected to be 10 percent higher than in 1985. Unit values are projected to decline by 9 percent in 1986. The volume of raw jute exports is expected to fall by 5 percent in 1985 as the poor 1984 harvest will continue to constrain exports until the new supplies from the next harvest become available after mid-year. In order to conserve supplies for domestic use, in October 1984 the Government restricted exports of raw jute to quantities already contracted or under bilateral agreements until supplies become available from the next harvest. Export volume in 1986 is expected to recover only to a level equivalent to 92 percent of the 1983 level. As a result of the above forecasts of prices and volumes, earnings from raw jute are expected to increase by 4 percent in 1985 and 10 perAn excess of SDR 8.9 million is estimated for raw jute. cent in 1986. (b) Jute goods. The share of jute goods in total jute exports increased from about 60 percent in the early 1970s to 75 percent in the shortfall year. Hessian cloth and bags represent about 80 percent of with carpet backing accounting for most of the remainder. these exports, Export earnings rose by 15 percent in the shortfall year. Although export volume fell by 5 percent as a result of the reduced availability of raw jute, this decline was more than offset by a 22 percent increase in the prices of jute goods as demand was increasing as a result of the world economic recovery. Increases in jute goods prices are constrained by the prices of synthetic substitutes, but in the short-run, they can rise sharply because of capacity constraints in the synthetic industry.
0 Table
6.
Bangladesh:
Value,
Volume, (1984
Value Total in (In
Share in Exports 1984 percent)
and Unit
= 100:
Value
Indices
In terms
by Major
Commodities,
1980-86
of SDRs)
Calendar
Years Projected 1985 1986
Shortfall in Percent of Level in Shortfall Year
1980
1981
1982
1983
1984
74 88 81 90 53 71 53 37
66 76 62 81 54 74 46 41
71 73 7-i 74 70 77 54 78
84 86 82 87 89 105 70 90
100 100 100 100 100 100 100 100
112 101 104 100 119 129 112 113
122 107 115 105 133 161 111 126
-4.0 -7.5 -7.0 -7.7 -0.5 11.1 -14.2 0.0
Volume Jute Raw jute Jute goods Non-jute Leather Tea Marine products
84 92 117 84 68 49 116 39
98 105 96 108 85 90 117 51
101 104 113 100 97 102 118 73
110 110 125 105 110 136 104 90
100 100 100 100 100 100 100 100
102 95 95 95 115 120 115 110
114 107 115 104 126 138 123 119
5.2 3.0 9.1 1.0 9.1 18.0 11.7 -2.9
Unit value Jute Raw jute Jute goods Non-jute Leather Tea Marine products
97 98 69
71 73 65 75 68 82 40 81
73 71 73 73 77 76 46 107
79 78 66 83 82 77 67 100
100 100 100 100 100 100 100 100
105 106 110 105 102 108 97 103
102
-9.2 -9.9 -14.7 -8.5 -7.3 -5.8 -23.2 4.0
Value Jute Raw jute Jute goods Non-jute Leather Tea Marine products
90.0 64.8 16.5 48.3 25.2 8.1 8.3 8.8
108 95 146 46 94
101 100 101 104 117 90 106
,
- 14 -
Export volume is expected to fall by a further 5 percent in 1985 as the effects of low raw jute supplies persist through most of the year. Jute goods prices are forecast to recover by 5 percent in 1985 because of continued supply constraints during much of the year. Export earnings in 1985 are expected to remain at about the same level as in 1984. Assuming a partial recovery in the 1985 jute harvest, export volume is expected to increase by 9 percent in 1986. With larger world supplies of raw jute, prices of jute goods are forecast to decline by 4 percent Earnings from jute goods exports, therefore, are expected to in 1986. An excess of SDR 29.2 million is increase by 5 percent in 1986. estimated for jute goods. (2)
Non-jute
exports
Non-jute exports were fairly evenly distributed in the shortfall year among leather, tea, fish, and other exports. A shortfall of SDR 3.8 million is estimated for non-jute exports, consisting of shortfalls in leather and other exports that are partly offset by an excess in tea exports. (a) Ieather is exported in both raw and processed form, with the share of processed leather rising in recent years. The major market for leather exports is Italy. Bangladesh is a relatively small exporter of leather on world markets. Export volume rose by 33 percent in 1983 as world demand for leather recovered sharply from the recession. It then fell by 26 percent in 1984 because of supply factors related to the floods. As the incomes of many farmers were reduced by crop losses caused by flood damage, demand for meat declined, and, as a consequence, the supply of hides was reduced. In response to strong world demand, world prices of leather This price increase limited the increased by about 30 percent in 1984. fall in earnings caused by lower volume to only 5 percent. With a recovery in meat consumption already under way the volume of leather exports is expected to recover by 19 percent in 1985 and further to the With demand projected to remain strong, leather 1983 level by 1986. prices in the two post-shortfall years are projected to rise at an A shortfall of SDR 7 million is average rate of 8 percent per year. estimated for leather. Bangladesh accounts for a relatively small share of (b) Tea. world production and exports of tea. Tea production in 1983184 was relatively low in Bangladesh because of unfavorable weather. Although this caused export volume in 1983 and 1984 to be on average 14 percent lower than in 1982, export earnings rose by 43 percent in 1984 because of a sharp increase in world tea prices. World supplies in 1984 were affected by droughts in India and Sri Lanka, the leading exporters. India, which is the largest producer and consumer of tea, imposed export controls on tea in the last quarter of 1984 in order to conserve supplies for domestic consumption.
- 15 -
Assuming a return to normal weather, export volume by Bangladesh is expected to recover by 15 percent in 1985, still below the 1982 level, and by 7 percent in 1986. Tea prices are expected to decline by 3 percent in 1985 and by 7 percent in 1986 as world supplies become more plentiful. Earnings are projected to rise by 12 percent in 1985 and then to fall by one percent in 1986. An excess of SDR 9.2 million is estimated for tea exports in 1984. (c) Exports of marine products consist mainly of frozen shrimp. The major markets are Japan and other industrial countries. The export volume grew by 23 percent in 1983 and by 11 percent in 1984 reflecting larger catches associated with an increase in the fleet of trawlers in operation. Prices, however, declined by 7 percent during these two years because of competition from other suppliers in Asia. Earnings rose by 16 percent in 1983 and by 11 percent in the shortfall year. Volume of marine product exports is expected to increase at an annual rate of 10 percent in the two post-shortfall years. Prices are expected to recover by about 3 percent per year as expected demand increases are tempered by continued competition among fish exporters. Earnings are projected to rise by 13 percent in 1985 and by 12 percent Earnings from marine product exports in 1984 were approximately in 1986. equal to their medium-term trend value. (d) Other exports. More than two-thirds of other exports in the shortfall year consisted of garments. Other products in this group are newsprint, petroleum byproducts, handicrafts, fruit, vegetables, and molasses. Other exports increased by 67 percent in the spices, by garment shortfall year, and this growth was accounted for entirely exports, which more than tripled. Garment exports accounted for 72 percent of other exports in 1984 compared with 15 percent in 1982. The main impetus for this growth has been the existence of ample production capacity combined with increased market opportunities for Bangladesh provided by restrictions imposed by the industrial countries on imports of garments from larger exporting countries. Other exports are expected to increase by 72 percent in 1985. Again, most of this growth is expected to come from garment exports, which at the end of 1984 were already being exported on a scale to earn SDR 80 million per year compared with only SDR 40 million at the beginning of the year. During 1985, Bangladesh is expected to enter into bilateral the negotiations with the United States, Canada, and the EC concerning limitation of garment exports from Bangladesh to these markets. Accordingly, garment exports are only expected to grow by 9 percent in 1986 resulting in a similar deceleration in the rate of growth of other Although an excess of SDR 20.8 million is calculated for exports. garments, a small shortfall of SDR 2.8 million is estimated for other exports as a whole.
- 16 -
4.
Staff
appraisal
and proposed
decision
The authorities of Bangladesh are expected to request a purchase equivalent to SDR 54.95 million (19.1 percent of quota) under Decision No. 6860-(81/81) in respect of a net shortfall of SDR 108.2 million for the 12 months ended December 1984. The proposed purchase is in relation If approved, the proposed purchase to an excess in cereal imports. would raise the member's aggregate purchases outstanding under Decision to 50 percent of quota. No. 6860-(81/81) and Decision No. 6224-(791135) Bangladesh's balance of payments position, which had improved during 1982183-1983184, has weakened considerably during 1984185 as a result of a sharp increase in cereal imports necessitated by a drop in cereal Despite an output and a substantial reduction in workers' remittances. expected improvement in the capital account, the overall balance is projected to record a deficit of SDR 170 million in 1984/85. Gross international reserves are projected to decline from SDR 499 million at end-1983/84, equivalent to 2.6 months of imports, to SDR 335 million, The staff considers equivalent to 1.5 months of imports, by end-1984185. that the balance of payments need of Bangladesh justifies the proposed purchase. Bangladesh has had a good record of cooperation with the Fund. In 1982183, the authorities implemented an adjustment program which was All the performance supported by a stand-by arrangement from the Fund. criteria under the arrangement were observed and Bangladesh made all The balance of payments situation improved conscheduled purchases. siderably, as reflected in substantial surpluses being recorded in both In the current fiscal year (1984/85) the balance 1982183 and 1983184. of payments has come under pressure largely because of the effects of In response, the authorities have implemented some adverse weather. corrective measures aimed mainly at containment of credit expansion and liberalization of the secondary exchange market; they are currently considering further adjustment measures to improve the country's balance The authorities have remained in close contact of payments position. with the Fund; a mission is expected to visit Bangladesh in the latter part of March to conduct the 1985 Article IV consultation and to assist the authorities in the formulation of the required adjustment measures. For these reasons, the staff considers that the proposed purchase meets the cooperation requirement associated with purchases in the lower CF tranche. An excess of SDR 139.7 million is estimated for the cost of commercial cereal imports in 1984. The excess is about evenly divided between rice (excess of SDR 68.5 million) and wheat (excess of SDR 71.2 million). Total commercial cereal imports rose from an average The unof SDR 89.9 million in 1982-83 to SDR 266.6 million in 1984. usually large cereal imports in 1984 were required because of the effect on rice output of a drought in the spring and a series of floods between May and September 1984. Assuming a return to normal weather, commercial cereal imports are expected to decline to more normal levels in 1985 and
- 17 -
The staff considers that the excess estimated for 1984 is temporary 1986. to adverse weather conditions, it in character and, since it was related is largely attributable to circumstances beyond the control of the member. An excess of SDR 31.5 million is estimated for total merchandise accounted for by jute exports exports in 1984; the excess is entirely (excess of SDR 38.0 million) which rose by 17 percent in 1984. A shortfall of SDR 3.8 million estimated for non-jute exports consists of shortfalls in leather and other exports that were partly offset by an excess in tea exports. The request for a compensatory financing purchase under Decision 6860-(81/81) is expected to include a statement that Bangladesh will cooperate with the Fund in efforts to find, where required, appropriate solutions for its balance of payments difficulties. The staff considers that the expected request will meet all the requirements set forth in that decision. Accordingly, the following draft decision is proposed for adoption by the Executive Board after a duly authenticated request has been received: No.
The Fund has received
1. Bangladesh
for
a purchase
of SDR 54.95
Financing
of Fluctuations
on Compensatory Imports 1981,
a request
(Executive
Board Decision
from the Government
million
under
of
the Decision
in the Cost of Cereal
No. 6860-(81/81),
adopted
May 13,
as amended). 2.
approves 3. Section
The Fund notes the purchase
in accordance
The Fund waives 3(b)(iii).
the representation with
the limitation
of Bangladesh the request. in Article
V,
and
- 18 -
ANNEX
Bangladesh - Fund Relations (As of February 15, 1985) (Amounts I.
in millions
Membership
of SDRs, unless
(a)
Date of Membership:
August
(b)
Status:
Article
III.
General
indicated)
Status
Financial
A. II.
otherwise
Department
(General
17, 1972 XIV Relations
Resources
Account)
(a)
Quota:
(b)
Total Fund holdings of taka: (As percent of quota)
625.1 (217.4)
(c)
Fund credit: (As percent of quota) Credit tranches l/ (As percent of-quota) CFF (As percent of quota)
360.0 (125.2) 271.2 (94.3) 88.8 (30.9)
(d)
Reserve
tranche
(e)
Current
operational
(f)
Lending
to the Fund:
Stand-By
287.5
and Extended
(a)
There
(b)
Previous
Type of Arrangement SBA SBA SBA EFF SBA
position:
22.4 --
budget:
Arrangements
is no current stand-by
arrangement. and extended
Date of Approval
Duration
06114174 07128175 07/30/79 12/08/80 03128183
1 1 1 3 5
l/ Ordinary and borrowed resources. 71 Arrangements became inoperative Juiie 1982.
arrangements: Amount
year year year years 2/ monthsin
31.25 62.50 85.00 800.00 68.40
Utilization 31.25 62.50 85.00 220.00 68.40
June 1981 and was cancelled
in
ANNEX
- 19 -
(c)
IV.
V.
Special
facilities:
Type of Special Facility
Date of Approval
Amount
CFF CFF
02117182 08/30/82
60.0 71.2
SDR Denartment (a)
Net cumulative
(b)
Holdings: (As percent
Administered (a)
(b)
Trust (i> (ii>
of net cumulative
allocations)
Fund loans: Disbursed Outstanding
122.2 100.2
SFF Subsidy Account: Donations to Fund (i> Loans to Fund (ii> Payments by Fund (iii)
Exchange
(K)
Accounts
B. VI.
47.1
allocation:
Nonfinancial
---
11.2 Relations
Rate Arrangement
Since August 13, 1979 the taka has been pegged, within margins, to The exchange rate of the taka in terms of a currency-weighted basket. the pound sterling, which had been the intervention currency from 1972 to January 10, 1982, was changed from Tk 38.422 to Tk 39 per pound sterling On January 11, 1983, the intervention currency was on August 24, 1982. changed to the U.S. dollar and initial buying and selling rates of Tk 24.48 and Tk 24.52 per U.S. dollar, respectively, were announced. The authorities also maintain a secondary exchange market in which proremittances and nontraditional exports are auctioned ceeds from workers' At the end of January 1985, the exchange rate in the official off. market was Tk 26.0 per U.S. dollar. VII.
Last
Article
IV Consultation
The last Article IV consultation report (SM/84/151) was discussed The following by the Executive Board on July 20, 1984 (EBM/84/113). decision (Decision No. 7460-(84/113)) was adopted: relating to Bangladesh's exchange 1. The Fund takes this decision Sections 2 and 3, and in concluding the measures subject to Article VIII, 1983 Article XIV consultation with Bangladesh in the light of the 1983
.
ANNEX
- 20 -
Article IV consultation with Bangladesh conducted under Decision over Exchange No. 5392-(77/63), adopted April 29, 1977 (Surveillance Rate Policies). certain restrictions 2. The Fund notes that Bangladesh maintains on payments and transfers for current international transactions and multiple currency practices as described in SM/83/147. The Fund welcomes the reduction in the advance import deposit requirements implemented in 1982/83 and encourages Bangladesh to eliminate these requirements, to channel more imports through the secondary exchange market, and to terminate the bilateral payments arrangements with Fund members. VIII.
Consultation
Cycle
A consultation of the 1984 Article IX.
Technical
cycle of 12 months was indicated IV consultation.
in the Summing Up
Assistance
(a) CBD: A mission in February 1985 to review
led by Mr. Sundararajan visited bank regulations and financial
Bangladesh developments.
Bangladesh in January 1985 to (b) FAD: Mr. Premchand visited identify technical assistance requirements in the area of revenue forecasting. (c)
Other:
Bangladesh in December 1984 in (i) Mr. Gurgen (STAT) visited order to document the sources and method used in the compilation and to make recommendations for of balance of payments statistics, improvement. Bangladesh in January(ii) Mr. M. Wasfy (STAT) visited February 1984 to establish a common data base and methodology for ASD and STAT in respect of government financial statistics. X.
Resident
Representative
The Resident The current 1972. in August 1984.
Representative's office Resident Representative,
was established in Dhaka in Mr. Samuel Itam was appointed
OF INTERNATIONAL MONETARY AND NOT FOR PUBLIC USE
FUND
EBS/85/62 CONFIDENTIAL
March
15,
To:
Members
From:
The Secretary
Subject:
Bangladesh - Use of Fund Resources - Compensatory Financing Facilitv - Fluctuations in the Cost of Cereal Imports
of
the
Executive
Board
Attached for consideration by the Executive Directors paper on a request expected to be received from Bangladesh for equivalent to SDR 54.95 million under the compensatory financing A draft decision appears on page 17.
a date
This subject to be announced.
If Executive relating to this paper Pk. Kaibni (ext. 7721).
Att:
(1)
will
be brought
Directors prior to
1985
to
the
agenda
have technical or the Board discussion,
for
factual they
is a a purchase facility.
discussion
on
questions should contact
CONFIDENTIAL
INTERNATIONAL MONETARYFUND BANGLADESH Facility-Use of Fund Resources-- Compensatory Financing Fluctuations in the Cost of Cereal Imports Prepared
by the Research
(Ln consultation
Department
and the Asian
with the Exchange and Trade and Treasurer's Departments) Approved
Department
Relations,
Legal,
by Wm. C. Hood and Tun Thin March
14,
1985
The Managing Director has been informed that the authorities of Bangladesh will shortly request a purchase of SDR 54.95 million (equivalent to 19.1 percent of quota) under the Decision on Compensatory Financing of Fluctuations in the Cost of Cereal Imports (Decision The expected request No. 6860-(81/81), adopted May 13, 1981, as amended). is in respect of a net shortfall of SDR 108.2 million for the year ended December 1984, consisting of an excess of SDR 139.7 million in the cost of cereal imports that is partly offset by an excess of SDR 31.5 million in merchandise exports. the proposed purchase would raise If approved, outstanding purchases relating to the cereals component to SDR 77.35 million (26.9 percent of quota) and total purchases outstanding under Decisions No. 6224 and No. 6860 together to SDR 143.75 million (50 percent of quota). i/ It would also raise Fund holdings of the member's currency from 217.4 percent of quota to 236.5 percent of quota. A waiver of the limitation of Article V, Section 3(b)(iii) of the Fund's Articles of Agreement will be required and is being proposed. This paper, which is being circulated in advance of request by Bangladesh, is presented in four sections and sections deal with: (I) balance of payments position and the Fund; (2) determination of the amount of compensation; the excess in the cost of cereal imports and the shortfall exports; and (4) staff appraisal and proposed decision. of Bangladesh with the Fund are summarized in the annex.
the formal The an annex. cooperation with (3) causes of in merchandise The relations
purchases of SDR 88.8 million in respect -11 Bangladesh has outstanding of two previous compensatory financing purchases. An early drawing of SDR 60 million was made on February 17, 1982 under Decision No. 6224, of which SDR 23.1 million was repurchased on August 13, 1982 under paragraph 7 of that decision. Another early drawing of SDR 71.2 million was made on August 30, 1982, under Decision No. 6860, consisting of SDR 37.6 million in relation to an export shortfall and of SDR 33.6 million in relation to an excess in cereal imports. A repurchase of SDR 19.3 million was made on March 14, 1983 of which SDR 8.1 million was in relation to the export component and SDR 11.2 million was in relation to the cereal component.
-2-
1.
Balance a.
of payments
Balance
position
of payments
and cooperation
with
the Fund
position
After two successive years of strong improvements, the overall balance of payments position of Bangladesh has come under considerable strains in 1984/85. These strains originated mainly from the adverse effects of drought in the latter part of 1983/84 and severe floods in the early part of 1984185 on domestic foodgrain production. In order to meet consumption requirements, commercial imports of cereals more than tripled. In addition, because of reduced demand for Bangladesh workers abroad, mainly in the Middle East, workers' remittances have declined sharply. Consequently, the balance of payments position is expected to record a large deficit that will result in a sharp drawdown in gross international reserves. In 1983/84, the overall balance of payments of Bangladesh recorded a surplus of SDR 250 million (Table 1). Export receipts rose by nearly 25 percent mainly because of higher prices for traditional exports of raw jute and jute goods. Concurrently, import payments rose by 8 percent, These developments, together involving only a modest increase in volume. with sharply reduced net payments on services resulting from higher interest earnings on international reserves and a continued high level of workers' remittances, caused a reduction in the current account deficit from SDR 966 million (8.5 percent of GDP) in 1982/83 to SDR 890 million (7.4 percent of GDP) in 1983/84. Although aid disbursements declined somewhat, the net capital account was more than sufficient to cover the current account deficit, resulting in an overall surplus and a significant increase in gross international reserves. At the end of 1983184, gross international reserves stood at about SDR 500 million, equivalent to 2.6 months of imports, and the unused balances in the foreign currency accounts more than doubled to SDR 136 million. has deteriorated As noted above, the balance of payments position in 1984185. Despite a substantial improvement in export prices, the value of exports is forecast to grow by only 10 percent because of sharply reduced volumes caused by the impact of the floods on jute production and exports. At the same time, the value of imports is forecast to rise by nearly 23 percent, mainly because of higher commercial imports of cereals necessitated by the shortfall in domestic foodgrain production. Commercial cereal imports are expected to rise from about SDR 92 million in 1983/84 to about SDR 277 million in 1984/85, accounting for about 10 percent of total projected imports. The deterioration in the trade balance is expected to be compounded by an increase in net payment on services and a 23 percent decline in workers' remittances. Consequently, the current account deficit is forecast to rise from SDR 0.9 billion in 1983/84 to SDR 1.5 billion in 1984/85, equivalent to 10.6 percent of projected GDP. Although net capital inflows are expected to increase by about 23 percent because of substantial commercial borrowings for food an overall balance of payments imports and increased aid disbursements,
-3-
Table
1.
Bangladesh: (In
Balance
of Payments,
millions
of SDRs)
1980181 A.
B.
Current account -1,192 Trade balance -1,533 Export, f.o.b. 615 Imports, c.i.f. -2,148 Services, net 10 Receipts 238 Payments -228 Of which: Interest (-65) Private transfers 331 Capital account, net Offical transfers Aid disbursements Food Commodity Project Food loans, net Borrowings Repayments Other medium- and long-term loans Loans Amortization Trust Fund, net Short-term loans, net Other (including valuation adjustment and errors and omissions)
C.
SDR allocation
D.
Overall
E.
Financing (increase in assets -) Use of Fund resources. net Change in other reserve-related items
balance
(A+B+C)
103 ... 995 (168) (341) (486) -30 (--I (-30) -31 g;;, (7) 13
1980/81-1984/85
Years Ending June 1981182 1982183
1983184
Prel. Est. 1984185
-1,236 -1,523 507 -2,030 -53 201 -254 (-97) 340
-890 -1,W 783 -2,230 -27 276 -303 (-106) 584
-1,530 -1,840 860 2,750 -92 300 -393 (-136) 452 1,400 31 1,300 (250) (460) (590) 143 (180) (-37)
-966
-1,445 628 -2,073 -105 212 -317 (-118) 584
994 ... 1,001 (187) (341) (473)
1,281 ... 1,304 (235) (480) (589)
1,140 4 1,208 (264) (418) (526)
(2, C-32)
$1 C-9)
(ii, (-57)
-32 (...1 (-32) (--I 39
-89 (--I C-88)
-66 (8) l-66) C-8) -10
C-1)
-33
-80 (10) (-75) (-15) -40
66
-7
55
11
--
-17
--
--
--
--
-242
315
250
-170
-315
-250
170
19
-11
-162 162 143
242
19
206
36
45 -360
-269
181
Memorandum items: Gross international reserves (end-ofperiod) In months of imports, c.i.f. Sources:
Data provided
217
112
335
499
335
1.2
0.6
1.9
2.6
1.5
by the Bangladesh
authorities;
and staff
estimates.
-4-
deficit of SDR 170 million is forecast. This deficit is expected to be financed by a drawdown in gross international reserves; taking into account the proposed purchase under the CFF, net use of Fund resources will be a negative SDR 11 million. Bangladesh's gross international reserves, which stood at SDR 500 milLion at the end of June 1984 fell to SDR 450 million at end-January 1985 and are projected to fall to SDR 335 million by the end of June 1985. At reserves would be equivalent to 1.5 months of 1984/85 imports, that level, a sharply lower import coverage than the 2.6 months provided by reserves held a year earlier. b.
Cooperation
with
the Fund
During Bangladesh has a good record of cooperation with the Fund. 1982183 Bangladesh adopted an economic program supported by a stand-by All perforarrangement from the Fund in the amount of SDR 68.4 million. mance criteria under that arrangement were met and all scheduled purchases the staff report for the 1984 Article IV consulwere made. In discussing tation last July, Executive Directors noted with satisfaction that The economic Bangladesh's overall economic performance was favorable. situation has since deteriorated significantly as a result of severe which caused substantial damage to foodgrain production, thus floods, and an unanticipated decline in necessitating additional food imports, A sharp increase in domestic credit and the impoworkers' remittances. sition last July of a 10 percent ceiling on the premium in the secondary foreign exchange market may have also contributed to the worsening of Bangladesh's external position. The authorities have been extremely concerned about the deterioration in the country's economic situation and have implemented some corrective measures aimed principally at containing credit growth and liberalising the operations of the secondary foreign exchange market. These measures, which were broadly appropriate, included: a 2 percentage point increase in interest rates on advances against fixed-term deposits and financial paper securities to 18 percent and 20 percent, respectively; an increase from 16 percent to 18 percent in interest rates on trading credits; an increase in the Bangladesh Bank rate from 10.5 percent to 11.0 percent; a temporary moratorium on rediscounting by Bangladesh Bank with certain and imposition of ceilings on advances by banks in order to exceptions; limit domestic credit expansion during the current fiscal year to the ceiling on the premium in approximately 18 percent. In addition, the secondary foreign exchange market was raised to 12 percent on November 1, 1984. Subsequently, it was decided to adjust the premium from time to time in light of prevailing conditions; on January 4, 1985 the electricity tariff In addition, the premium was set at 14 percent. was raised by 3.5 percent in December 1984, and in January 1985 fertiliser prices were raised by 7 percent on average.
-5-
Bangladesh maintains multiple currency practices and an exchange At the conclusion of the restriction that are not approved by the Fund. 1984 Article IV consultation with Bangladesh the Executive Board encouraged Bangladesh to eliminate these restrictive practices. The authorities have pursued a flexible exchange rate policy in recent years which should provide a basis for further liberalization of the external The authorities have also including these restrictive practices. sector, expressed their commitment to further liberalization of the import regime. The Bangladesh authorities have remained in close contact with the staff and are currently considering the implementation of more comprehensive measures to improve the country's balance of payments position. The staff mission, which is expected to visit Bangladesh in the second half of March to conduct the Article IV consultation, will assist the The authorities in the formulation of the required adjustment measures. staff considers that the requirement of cooperation associated with the proposed use of Fund resources under the CFF has been met by the implementation of the above measures, and by the expressed desire of the authorities to continue cooperating with the Fund in an effort to find appropriate solutions to the country's balance of payments difficulties. 2.
Determination
of the amount of compensation
The latest actual data on cereal imports and on merchandise exports are available through December 1984, and the authorities of Bangladesh have requested that the calendar year 1984 be treated as the shortfall year. 1/ Executive Board Decision No. 6860 provides that the amount of compensation be calculated as the sum of the excess in the cost of cereal imports and the shortfall in merchandise exports, subject to quota limits. 11 Concerning the last two purchases made by Bangladesh, ex-post calculations based on actual data for the related five-year trend periods indicate that the export shortfalls supporting the two purchases were underestimated. For the first purchase (SDR 36.9 million in February 1982), the shortfall based on actual data amounts to SDR 82.4 million, With compared with a shortfall of SDR 36.9 million calculated earlier. perfect foresight, Bangladesh's first purchase would have amounted to SDK 82.4 million (instead of SDR 36.9 million). For the second purchase consisting of SDR 29.5 million in relation to merchan(SDR 51.9 million, dise exports and of SDR 22.4 million in relation to cereal imports) use of actual data provides an export shortfall of SDR 86.2 million, compared with the shortfall of 29.5 million calculated earlier, and a shortfall, rather than an excess, in cereal imports. With perfect foresight, Bangladesh would not have opted for a purchase under the cereal decision. Its second purchase, which would have been based on the export shortfall of SDR 86.2 million, would have amounted to SDR 45.0 million, after reducing the shortfall by SDR 41.2 million in order to avoid double compensation; since the shortfall year for the first purchase overlaps the shortfall year for the second purchase by six months, double compensation is avoided by subtracting half of the first purchase (41.2 = 1/2x82.4) from the shortfall of SDR 86.2 million related to the second purchase.
-6-
For the calendar year 1984, the net shortfall, defined as the sum of the export shortfall and the excess of cereal imports, is estimated at SDR 108.2 million. This amount represents an excess of SDR 139.7 million in the cost of cereal imports that is partly offset by an excess of Consequently, the SDR 31.5 million in merchandise exports (Table 2). which is roughly half the amount proposed purchase of SDR 54.95 million, of the net shortfall, is entirely in respect of the excess in the cost of cereal imports. Table
Bangladesh:
2.
Determination (In
millions
of the Amount of Compensation of SDRs)
Calendar 1982 1.
Commercial
2.
Merchandise
3.
Net shortfall = (3.1) + (3.2) 3.1 Excess in cereal imports Export shortfall 3.2
4.
Proposed -l/
cereal
imports
exports
104.0
75.8
266.6
106.4
81.5
553.6
653.5
780.7
877.5
952.2
108.2 139.7 -31.5 54.95
purchase
Based on judgmental a.
1983
Cereal
import
Years Forecast l/ 1984 1985 1986
forecasts
(Tables
3 and 5).
excess
cereal imports by Bangladesh In calendar year 1984, commercial nearly three times the average value of amounted to SDR 266.6 million, The value of commercial cereal such imports in the two preceding years. imports is expected to decline to an average of SDR 94.0 million in the for calendar year two following years, and the excess in cereal imports The excess is about 1984 is estimated at SDR 139.7 million (Table 3). evenly divided between wheat (excess of SDR 71.2 million) and rice (excess of SDR 68.5 million). b.
Export
shortfall
Merchandise exports of SDR 780.7 million for calendar year 1984 were 30 percent larger than average exports in the two preceding years. Earnings in 1985 and 1986 are projected to grow at an average annual rate of about These movements result in an excess of SDR 31.5 million in 11 percent. merchandise exports for calendar year 1984.
-7-
Table
3.
Bangladesh: Cereal Imports and Excess Major Commodities, 1980-86 Calendar
1980
1981
1982
Total Rice Wheat
91.2 -91.2
-z --
-104.0 67.7 36.3
Years
1983 (In
1984 millions
-75.8 7.7 68.1
3.
-= --
-100 -100
-----
-27 -m 87
Causes of the excess in cereal imports the shortfall in merchandise extorts a.
Cereal
Projected 1985 1986
Arithmetic Excess
of SDRs)
-266.6 117.1 149.5
(Percentage Total Rice Wheat
by
-106.4 30.4 76.0
-81.5 19.8 61.7
139.7 68.5 71.2
changes)
252 1,420 120
-60 -XT -49
-23 -35 -19
and
imports
The economy of Bangladesh is predominantly agricultural with about 80 percent of the cultivated land devoted to rice; wheat has recently Progress has been made overtaken jute as the second most important crop. toward the goal of self-sufficiency in foodgrains, with total imports including food aid in recent years accounting for an average of only about 10 percent of annual supplies compared with over 20 percent in the late When crops are adversely affected by unfavorable 1960s and early 1970s. weather, food aid generally does not rise sufficiently to cover the which are mostly met by cereal imports on commercial additional deficits, Wheat is often imported when rice is in short supply because its terms. price is lower than that of rice. The Government administers a foodgrain procurement and distribution system that is designed to assure adequate food supplies to the population About 90 percent of the and to provide a minimum price to the producers. Government's foodgrain supplies are acquired through imports, mostly under food aid, but commercial imports can be large in years of unusual The remaining 10 percent of government supplies is purchased from. need. these purchases account for only about 3 percent domestic producers; while the remainder is sold by of total domestic foodgrain production, The role of the government foodgrain producers on the free market. program is particularly important in years of serious damage to the crops,
-8-
In such circumstances, as occurred in 1984. sufficient supplies to enable it to respond particularly sudden shortages of foodgrains, segments of the population.
the Government must secure quickly in order to meet to the most vulnerable
Bangladesh harvests three crops of rice each year: the aman crop, which represents about one half of total rice production, is harvested in November/December; the boro crop, harvested in May/June, and the aus each account for about one fourth crop, harvested in August/September, There is only one crop of wheat a year, which of total rice production. Wheat is planted exclusively on high ground, is harvested in April/May. whereas rice is planted both on high ground and low lands. Rice grown for rice grown on low lands is susceptible to flood damage, while yields on high ground usually benefit from the additional rainfall. After growing at an average annual rate of almost 4 percent per year from 1978179 (July/June) to 1982183, total foodgrain production in Bangladesh increased by only 2 percent in 1983184, which was below the estimated population growth rate of about 3 percent per year. Lower foodgrain import arrivals during 1983, combined with larger releases from government stocks associated with flood losses to the aman crop in late 1983, resulted in total government foodgrain stocks declining by the end of 1983 to their lowest levels since 1979. In 1984, drought in the spring and a series of floods from May to September caused heavy damage to the boro and aus crops; losses to each crop are estimated at over 300 thousand tons, or somewhat more than 10 percent of usual output. In addition, flood losses to the aman crop in late 1984 are estimated at about 850 thousand tons, bringing total loss of rice output in 1984 to about 1.5 million tons. These losses were comparable to losses experienced in 1974, when the Government was less well prepared to deal with large shortages and famine spread in areas affected by the floods. Although current estimates indicate that the flood losses in 1984 were eventually offset by larger production of rice grown on high ground, particularly from the aman crop harvested at the end of 1984, serious food shortages emerged ine flooded areas. Output of wheat was not adversely affected and in fact was larger in 1984 than in 1983. -l/ l/ Cereal production data in Bangladesh are available only on a cropyear basis (July/June). In spite of the substantial flood losses that caused supply shortages in calendar year 1984, it is estimated that total cereal production for 1984/85 will be slightly larger than in the previous year. The main reason for this increase, in addition to a larger wheat crop, was the larger-than-expected aman harvest at the end of 1984 which resulted from improved yields. Thmarger production at the end of 1984, together with the continued import arrivals through the first quarter of 1985, are expected to ease the supply sFtuation considerably by the second quarter of 1985.
-9-
The Government responded quickly by releasing a significantly larger amount of foodgrains from government stocks than in past years; from July to December 1984 those releases amounted to 1.5 million tons, more These than double the amount released in the same period in 1983. releases were necessary because large segments of the population living in the flooded areas did not have the income with which to purchase grains on the open market; although increased production of rice grown on high ground eventually offset the flood losses, there were the usual difficulties in transporting grain from surplus to deficit areas in In spite of the government releases, domestic rice times of flood. prices increased by 24 percent in the last half of 1984. Food aid increased only by a modest amount in 1984, and the Government supplemented supply through large imports on commercial terms. Commercial rice imports rose to 477 thousand tons in 1984 from an average of 160 thousand tons in 1982-83, and commercial wheat imports rose to 956 thousand tons from an average of 362 thousand tons in 1982-83 imports of cereals increased from (Table 4). In value terms, commercial an average of SDR 89.9 million for 1982-83 to SDR 266.6 million in 1984. Table
4.
Bangladesh: Estimation Volume, and Unit Value (1984 = 100:
Value Share in Total Cereal in 1984 (In percent) 1980
In terms
of SDRs)
Calendar 1981
Value,
Years
1982
1983
1984
Projected 1985 1986
Excess in Percent of Level in Excess Year
-34 -61
-----
39 58 24
28 7 46
100 100 100
40 26 51
31 17 41
52.4 58.5 47.6
Volume Rice Wheat
42 -61
----
38 61 27
35 6 49
100 100 100
42 26 50
31 16 39
50.7 58.2 47.0
Unit value Rice Wheat
55 97
-----
92 95 90
98 105 93
100 100 100
101 99 102
106 107 105
0.4 -1.1 1.7
Value Rice Wheat
l
of the Excess in Cereal Imports by Major Commodities, 1980-86
100.0 43.8 56.2
commercial rice imports are expected Assuming a return to normal weather, to decline to 125 thousand tons in 1985 and 75 thousand tons in 1986. World rice prices are projected to decline in 1985 by about 3 percent, and to rise
- 10 -
by 8 percent in 1986. As a result of these movements, the value of rice imports is expected to decline from SDR 117 million in 1984 to SDR 30.4 million in 1985 and SDR 19.8 million in 1986. An excess of SDR 68.5 million is estimated for rice. The volume of commercial wheat imports is expected to decline to 475 thousand tons in 1985 and 375 thousand tons in 1986. These volume levels, which are still high by historical standards, are expected to be necessary in view of population growth and in order to maintain stocks at adequate levels. These projections assume slight increases in domestic wheat production, and food aid remaining constant at about the 1984 level. World wheat prices in 1985 are projected to remain at 1984 levels and to The cost of commercial wheat imports, increase by 3 percent in 1986. therefore, is expected to decline from SDR 149.5 million in 1984 to SDR 76.0 million in 1985 and to SDR 61.7 million in 1986. An excess of SDR 71.2 million is estimated for wheat. b.
Merchandise
extorts
Relatively strong growth of exports of 19 percent in the shortfall year resulted in an estimated excess of SDR 31.5 million (Table 5). outcome is largely explained by developments in jute exports. (1)
This
Jute exports
which accounted for 65 percent of total exports Jute exports, in the shortfall year, consist of raw jute (17 percent) and jute goods (48 percent). They increased by 17 percent in the shortfall year, following a similar increase in 1983. A sharp slowdown to an average of about 3 percent a year is projected for the two post-shortfall years. An excess of SDR 38.0 million is estimated for jute exports in calendar year 1984. The primary uses of raw jute are in the manu(a) Raw jute. facture of packaging materials and for carpet backing. Bangladesh accounts for 30 percent of world production of raw jute and about 80 percent of world exports. The markets for raw jute have been declining or stagnant since the 1960s because of competition of synthetic substitutes (primarily polypropylene), which was accompanied by a decline in spinning capacity in the industrial countries and increased processing of jute in Jute prices have experienced a long-term jute-producing countries. downward trend which has been interspersed with brief periods of high prices. Low prices in the late 1970s and early 1980s resulted in declining jute output in the major producing countries. As a result, world jute production was less than consumption each year from 1980 through 1983. As world stocks diminished, prices began to increase in the last half of 1983. They then increased sharply from an average of US$411 per ton in the first half of 1984 to US$1,019 by year-end when unfavorable weather resulted in a sharp reduction of the jute harvest in Bangladesh. World
Table
5.
Bangladesh:
Export
Earnings
and Shortfalls
Calendar 1980
1981
1982 (In
Total Jute Raw jute Jute goods Non-jute Leather Tea Marine products Others Garments
--578.3 --444.3 103.8 340.5 --134.0 45.1 34.1 25.1 29.7 (0.9)
512.6 385.9 79.6 306.3 126.7 46.9 29.9 28.2 21.7 (3.7)
-553.6 -368.6 91.2 277.4 -185.0 48.9 34.8 53.5 47.8 (7.4)
-11 -n -77 -10
8 -z 15 -9
3 -12 12 -27 (311)
% 16 90 120 (100)
Commodities,
Years Projected 1985 1986
1983
1984
millions
of SDRs)
-653.5 P432.7 104.9 327.8 P220.8 66.7 45.1 61.9 47.1 (15.9) (Percentage
Total Jute Raw jute Jute goods Non-jute Leather Tea Marine products Others Garments
by Major
18 17 15 18 19 36 30 16 ,1;',,
-780.7 -505.7 128.3 377.4 -275.0 63.3 64.5 68.5 78.7 (56.6)
-877.5 -510.8 133.8 377.0 -366.7 81.9 71.9 77.2 135.7 (90.0)
952.2 543.4 147.5 395.9 408.8 101.9 71.4 86.2 149.3 (98.0)
changes) 19 17 22 15 25 -5 43 11
12 -i T 33 29 12 13 (75:)
9 z 10 5 ii -1 12 10 (9)
1980-86
Shortfall ArithGeometric metic
-31.5 -37.9 -8.9 -29.2 3.8 7.0 -9.2 0.0 (-2,'::)
-17.1 -33.4 -7.1 -26.3 16.2 9.2 -6.9 0.9 13.0 (-3.0)
I I
- 12 -
prices for 1984 as a whole were 96 percent higher than the average prices of the two preshortfall years, but average unit values for Bangladesh were only 44 percent higher because of forward contract sales and a lower volume in the last half of the year when prices were much higher. In Bangladesh, jute is planted June through August. Planting the affected by drought and harvesting result, production was reduced by raw jute exports fell by 20 percent decline in export volume, earnings because of the increase in export
in the spring and harvested during spring 1984 crop was adversely was affected by severe floods. As a about 18 percent, and the volume of (Table 6). In spite of the sharp increased by 22 percent in 1984 unit values.
Assuming a recovery in world production of crops to be harvested after mid-1985, jute prices are expected to remain high in the first half of 1985 and then decline somewhat toward the end of the year. The decline will be limited, however, because of the need to replenish world and by the constraint on planted acreage in Bangladesh due to stocks, seed shortages. Since Bangladesh sells its raw jute under forward contracts several months in advance, the unit value of its raw jute exports in 1985 is expected to be 10 percent higher than in 1985. Unit values are projected to decline by 9 percent in 1986. The volume of raw jute exports is expected to fall by 5 percent in 1985 as the poor 1984 harvest will continue to constrain exports until the new supplies from the next harvest become available after mid-year. In order to conserve supplies for domestic use, in October 1984 the Government restricted exports of raw jute to quantities already contracted or under bilateral agreements until supplies become available from the next harvest. Export volume in 1986 is expected to recover only to a level equivalent to 92 percent of the 1983 level. As a result of the above forecasts of prices and volumes, earnings from raw jute are expected to increase by 4 percent in 1985 and 10 perAn excess of SDR 8.9 million is estimated for raw jute. cent in 1986. (b) Jute goods. The share of jute goods in total jute exports increased from about 60 percent in the early 1970s to 75 percent in the shortfall year. Hessian cloth and bags represent about 80 percent of with carpet backing accounting for most of the remainder. these exports, Export earnings rose by 15 percent in the shortfall year. Although export volume fell by 5 percent as a result of the reduced availability of raw jute, this decline was more than offset by a 22 percent increase in the prices of jute goods as demand was increasing as a result of the world economic recovery. Increases in jute goods prices are constrained by the prices of synthetic substitutes, but in the short-run, they can rise sharply because of capacity constraints in the synthetic industry.
0 Table
6.
Bangladesh:
Value,
Volume, (1984
Value Total in (In
Share in Exports 1984 percent)
and Unit
= 100:
Value
Indices
In terms
by Major
Commodities,
1980-86
of SDRs)
Calendar
Years Projected 1985 1986
Shortfall in Percent of Level in Shortfall Year
1980
1981
1982
1983
1984
74 88 81 90 53 71 53 37
66 76 62 81 54 74 46 41
71 73 7-i 74 70 77 54 78
84 86 82 87 89 105 70 90
100 100 100 100 100 100 100 100
112 101 104 100 119 129 112 113
122 107 115 105 133 161 111 126
-4.0 -7.5 -7.0 -7.7 -0.5 11.1 -14.2 0.0
Volume Jute Raw jute Jute goods Non-jute Leather Tea Marine products
84 92 117 84 68 49 116 39
98 105 96 108 85 90 117 51
101 104 113 100 97 102 118 73
110 110 125 105 110 136 104 90
100 100 100 100 100 100 100 100
102 95 95 95 115 120 115 110
114 107 115 104 126 138 123 119
5.2 3.0 9.1 1.0 9.1 18.0 11.7 -2.9
Unit value Jute Raw jute Jute goods Non-jute Leather Tea Marine products
97 98 69
71 73 65 75 68 82 40 81
73 71 73 73 77 76 46 107
79 78 66 83 82 77 67 100
100 100 100 100 100 100 100 100
105 106 110 105 102 108 97 103
102
-9.2 -9.9 -14.7 -8.5 -7.3 -5.8 -23.2 4.0
Value Jute Raw jute Jute goods Non-jute Leather Tea Marine products
90.0 64.8 16.5 48.3 25.2 8.1 8.3 8.8
108 95 146 46 94
101 100 101 104 117 90 106
,
- 14 -
Export volume is expected to fall by a further 5 percent in 1985 as the effects of low raw jute supplies persist through most of the year. Jute goods prices are forecast to recover by 5 percent in 1985 because of continued supply constraints during much of the year. Export earnings in 1985 are expected to remain at about the same level as in 1984. Assuming a partial recovery in the 1985 jute harvest, export volume is expected to increase by 9 percent in 1986. With larger world supplies of raw jute, prices of jute goods are forecast to decline by 4 percent Earnings from jute goods exports, therefore, are expected to in 1986. An excess of SDR 29.2 million is increase by 5 percent in 1986. estimated for jute goods. (2)
Non-jute
exports
Non-jute exports were fairly evenly distributed in the shortfall year among leather, tea, fish, and other exports. A shortfall of SDR 3.8 million is estimated for non-jute exports, consisting of shortfalls in leather and other exports that are partly offset by an excess in tea exports. (a) Ieather is exported in both raw and processed form, with the share of processed leather rising in recent years. The major market for leather exports is Italy. Bangladesh is a relatively small exporter of leather on world markets. Export volume rose by 33 percent in 1983 as world demand for leather recovered sharply from the recession. It then fell by 26 percent in 1984 because of supply factors related to the floods. As the incomes of many farmers were reduced by crop losses caused by flood damage, demand for meat declined, and, as a consequence, the supply of hides was reduced. In response to strong world demand, world prices of leather This price increase limited the increased by about 30 percent in 1984. fall in earnings caused by lower volume to only 5 percent. With a recovery in meat consumption already under way the volume of leather exports is expected to recover by 19 percent in 1985 and further to the With demand projected to remain strong, leather 1983 level by 1986. prices in the two post-shortfall years are projected to rise at an A shortfall of SDR 7 million is average rate of 8 percent per year. estimated for leather. Bangladesh accounts for a relatively small share of (b) Tea. world production and exports of tea. Tea production in 1983184 was relatively low in Bangladesh because of unfavorable weather. Although this caused export volume in 1983 and 1984 to be on average 14 percent lower than in 1982, export earnings rose by 43 percent in 1984 because of a sharp increase in world tea prices. World supplies in 1984 were affected by droughts in India and Sri Lanka, the leading exporters. India, which is the largest producer and consumer of tea, imposed export controls on tea in the last quarter of 1984 in order to conserve supplies for domestic consumption.
- 15 -
Assuming a return to normal weather, export volume by Bangladesh is expected to recover by 15 percent in 1985, still below the 1982 level, and by 7 percent in 1986. Tea prices are expected to decline by 3 percent in 1985 and by 7 percent in 1986 as world supplies become more plentiful. Earnings are projected to rise by 12 percent in 1985 and then to fall by one percent in 1986. An excess of SDR 9.2 million is estimated for tea exports in 1984. (c) Exports of marine products consist mainly of frozen shrimp. The major markets are Japan and other industrial countries. The export volume grew by 23 percent in 1983 and by 11 percent in 1984 reflecting larger catches associated with an increase in the fleet of trawlers in operation. Prices, however, declined by 7 percent during these two years because of competition from other suppliers in Asia. Earnings rose by 16 percent in 1983 and by 11 percent in the shortfall year. Volume of marine product exports is expected to increase at an annual rate of 10 percent in the two post-shortfall years. Prices are expected to recover by about 3 percent per year as expected demand increases are tempered by continued competition among fish exporters. Earnings are projected to rise by 13 percent in 1985 and by 12 percent Earnings from marine product exports in 1984 were approximately in 1986. equal to their medium-term trend value. (d) Other exports. More than two-thirds of other exports in the shortfall year consisted of garments. Other products in this group are newsprint, petroleum byproducts, handicrafts, fruit, vegetables, and molasses. Other exports increased by 67 percent in the spices, by garment shortfall year, and this growth was accounted for entirely exports, which more than tripled. Garment exports accounted for 72 percent of other exports in 1984 compared with 15 percent in 1982. The main impetus for this growth has been the existence of ample production capacity combined with increased market opportunities for Bangladesh provided by restrictions imposed by the industrial countries on imports of garments from larger exporting countries. Other exports are expected to increase by 72 percent in 1985. Again, most of this growth is expected to come from garment exports, which at the end of 1984 were already being exported on a scale to earn SDR 80 million per year compared with only SDR 40 million at the beginning of the year. During 1985, Bangladesh is expected to enter into bilateral the negotiations with the United States, Canada, and the EC concerning limitation of garment exports from Bangladesh to these markets. Accordingly, garment exports are only expected to grow by 9 percent in 1986 resulting in a similar deceleration in the rate of growth of other Although an excess of SDR 20.8 million is calculated for exports. garments, a small shortfall of SDR 2.8 million is estimated for other exports as a whole.
- 16 -
4.
Staff
appraisal
and proposed
decision
The authorities of Bangladesh are expected to request a purchase equivalent to SDR 54.95 million (19.1 percent of quota) under Decision No. 6860-(81/81) in respect of a net shortfall of SDR 108.2 million for the 12 months ended December 1984. The proposed purchase is in relation If approved, the proposed purchase to an excess in cereal imports. would raise the member's aggregate purchases outstanding under Decision to 50 percent of quota. No. 6860-(81/81) and Decision No. 6224-(791135) Bangladesh's balance of payments position, which had improved during 1982183-1983184, has weakened considerably during 1984185 as a result of a sharp increase in cereal imports necessitated by a drop in cereal Despite an output and a substantial reduction in workers' remittances. expected improvement in the capital account, the overall balance is projected to record a deficit of SDR 170 million in 1984/85. Gross international reserves are projected to decline from SDR 499 million at end-1983/84, equivalent to 2.6 months of imports, to SDR 335 million, The staff considers equivalent to 1.5 months of imports, by end-1984185. that the balance of payments need of Bangladesh justifies the proposed purchase. Bangladesh has had a good record of cooperation with the Fund. In 1982183, the authorities implemented an adjustment program which was All the performance supported by a stand-by arrangement from the Fund. criteria under the arrangement were observed and Bangladesh made all The balance of payments situation improved conscheduled purchases. siderably, as reflected in substantial surpluses being recorded in both In the current fiscal year (1984/85) the balance 1982183 and 1983184. of payments has come under pressure largely because of the effects of In response, the authorities have implemented some adverse weather. corrective measures aimed mainly at containment of credit expansion and liberalization of the secondary exchange market; they are currently considering further adjustment measures to improve the country's balance The authorities have remained in close contact of payments position. with the Fund; a mission is expected to visit Bangladesh in the latter part of March to conduct the 1985 Article IV consultation and to assist the authorities in the formulation of the required adjustment measures. For these reasons, the staff considers that the proposed purchase meets the cooperation requirement associated with purchases in the lower CF tranche. An excess of SDR 139.7 million is estimated for the cost of commercial cereal imports in 1984. The excess is about evenly divided between rice (excess of SDR 68.5 million) and wheat (excess of SDR 71.2 million). Total commercial cereal imports rose from an average The unof SDR 89.9 million in 1982-83 to SDR 266.6 million in 1984. usually large cereal imports in 1984 were required because of the effect on rice output of a drought in the spring and a series of floods between May and September 1984. Assuming a return to normal weather, commercial cereal imports are expected to decline to more normal levels in 1985 and
- 17 -
The staff considers that the excess estimated for 1984 is temporary 1986. to adverse weather conditions, it in character and, since it was related is largely attributable to circumstances beyond the control of the member. An excess of SDR 31.5 million is estimated for total merchandise accounted for by jute exports exports in 1984; the excess is entirely (excess of SDR 38.0 million) which rose by 17 percent in 1984. A shortfall of SDR 3.8 million estimated for non-jute exports consists of shortfalls in leather and other exports that were partly offset by an excess in tea exports. The request for a compensatory financing purchase under Decision 6860-(81/81) is expected to include a statement that Bangladesh will cooperate with the Fund in efforts to find, where required, appropriate solutions for its balance of payments difficulties. The staff considers that the expected request will meet all the requirements set forth in that decision. Accordingly, the following draft decision is proposed for adoption by the Executive Board after a duly authenticated request has been received: No.
The Fund has received
1. Bangladesh
for
a purchase
of SDR 54.95
Financing
of Fluctuations
on Compensatory Imports 1981,
a request
(Executive
Board Decision
from the Government
million
under
of
the Decision
in the Cost of Cereal
No. 6860-(81/81),
adopted
May 13,
as amended). 2.
approves 3. Section
The Fund notes the purchase
in accordance
The Fund waives 3(b)(iii).
the representation with
the limitation
of Bangladesh the request. in Article
V,
and
- 18 -
ANNEX
Bangladesh - Fund Relations (As of February 15, 1985) (Amounts I.
in millions
Membership
of SDRs, unless
(a)
Date of Membership:
August
(b)
Status:
Article
III.
General
indicated)
Status
Financial
A. II.
otherwise
Department
(General
17, 1972 XIV Relations
Resources
Account)
(a)
Quota:
(b)
Total Fund holdings of taka: (As percent of quota)
625.1 (217.4)
(c)
Fund credit: (As percent of quota) Credit tranches l/ (As percent of-quota) CFF (As percent of quota)
360.0 (125.2) 271.2 (94.3) 88.8 (30.9)
(d)
Reserve
tranche
(e)
Current
operational
(f)
Lending
to the Fund:
Stand-By
287.5
and Extended
(a)
There
(b)
Previous
Type of Arrangement SBA SBA SBA EFF SBA
position:
22.4 --
budget:
Arrangements
is no current stand-by
arrangement. and extended
Date of Approval
Duration
06114174 07128175 07/30/79 12/08/80 03128183
1 1 1 3 5
l/ Ordinary and borrowed resources. 71 Arrangements became inoperative Juiie 1982.
arrangements: Amount
year year year years 2/ monthsin
31.25 62.50 85.00 800.00 68.40
Utilization 31.25 62.50 85.00 220.00 68.40
June 1981 and was cancelled
in
ANNEX
- 19 -
(c)
IV.
V.
Special
facilities:
Type of Special Facility
Date of Approval
Amount
CFF CFF
02117182 08/30/82
60.0 71.2
SDR Denartment (a)
Net cumulative
(b)
Holdings: (As percent
Administered (a)
(b)
Trust (i> (ii>
of net cumulative
allocations)
Fund loans: Disbursed Outstanding
122.2 100.2
SFF Subsidy Account: Donations to Fund (i> Loans to Fund (ii> Payments by Fund (iii)
Exchange
(K)
Accounts
B. VI.
47.1
allocation:
Nonfinancial
---
11.2 Relations
Rate Arrangement
Since August 13, 1979 the taka has been pegged, within margins, to The exchange rate of the taka in terms of a currency-weighted basket. the pound sterling, which had been the intervention currency from 1972 to January 10, 1982, was changed from Tk 38.422 to Tk 39 per pound sterling On January 11, 1983, the intervention currency was on August 24, 1982. changed to the U.S. dollar and initial buying and selling rates of Tk 24.48 and Tk 24.52 per U.S. dollar, respectively, were announced. The authorities also maintain a secondary exchange market in which proremittances and nontraditional exports are auctioned ceeds from workers' At the end of January 1985, the exchange rate in the official off. market was Tk 26.0 per U.S. dollar. VII.
Last
Article
IV Consultation
The last Article IV consultation report (SM/84/151) was discussed The following by the Executive Board on July 20, 1984 (EBM/84/113). decision (Decision No. 7460-(84/113)) was adopted: relating to Bangladesh's exchange 1. The Fund takes this decision Sections 2 and 3, and in concluding the measures subject to Article VIII, 1983 Article XIV consultation with Bangladesh in the light of the 1983
.
ANNEX
- 20 -
Article IV consultation with Bangladesh conducted under Decision over Exchange No. 5392-(77/63), adopted April 29, 1977 (Surveillance Rate Policies). certain restrictions 2. The Fund notes that Bangladesh maintains on payments and transfers for current international transactions and multiple currency practices as described in SM/83/147. The Fund welcomes the reduction in the advance import deposit requirements implemented in 1982/83 and encourages Bangladesh to eliminate these requirements, to channel more imports through the secondary exchange market, and to terminate the bilateral payments arrangements with Fund members. VIII.
Consultation
Cycle
A consultation of the 1984 Article IX.
Technical
cycle of 12 months was indicated IV consultation.
in the Summing Up
Assistance
(a) CBD: A mission in February 1985 to review
led by Mr. Sundararajan visited bank regulations and financial
Bangladesh developments.
Bangladesh in January 1985 to (b) FAD: Mr. Premchand visited identify technical assistance requirements in the area of revenue forecasting. (c)
Other:
Bangladesh in December 1984 in (i) Mr. Gurgen (STAT) visited order to document the sources and method used in the compilation and to make recommendations for of balance of payments statistics, improvement. Bangladesh in January(ii) Mr. M. Wasfy (STAT) visited February 1984 to establish a common data base and methodology for ASD and STAT in respect of government financial statistics. X.
Resident
Representative
The Resident The current 1972. in August 1984.
Representative's office Resident Representative,
was established in Dhaka in Mr. Samuel Itam was appointed
