This report aims to explore the trade and foreign aid situation of Bangladesh.

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This report aims to explore the trade and foreign aid situation of Bangladesh.

Introduction

Uniquely for a country facing an extremely vulnerable ecology, Bangladesh has established a credible record of sustained growth within a stable macroeconomic framework. At a comparatively low level of development, it has also earned the distinctions of a major decline in population growth rate and of graduating to the medium human development group of countries by UNDP’s ranking. Child mortality was halved during the 1990s, life expectancy has increased to 61 years, net primary enrolment went up significantly as did women’s economic participation, gender parity has been achieved in primary and secondary education, and, depletion of tree cover has been reversed rising from seven to 15 percent through a focus on social forestry. Anti-poverty innovations such as micro-credit have gone on to win world renown.

The economy of Bangladesh is predominantly agro-based. But to attain sustainable self-reliance in the modern global economy, Bangladesh needs to shift its dependence from agriculture to industry sector. But Bangladesh lacks the capital to develop an industrial infrastructure which is required at this stage. To develop this capital Bangladesh has to depend upon foreign help – be it in the form of aid or trade. However, the country still doesn’t have the production capacity to be totally reliant on foreign trade to fulfill this need. So it needs to rely on foreign aid.

Foreign Aid means any capital inflow or other assistance given to a country which would not generally have been provided by natural market forces. In Bangladesh, foreign aid serves to bridge the gap between savings and investments and make up the deficits in Balance of Payments. Foreign aid is a major means of financing the country’s economic development.

Objective of the report

This report aims to explore the trade and foreign aid situation of Bangladesh. To attain this broader objective, this report will present information on broadly on the following topics –

1. An overview of the trade scenario of Bangladesh.

2. Foreign aid situation in Bangladesh

3. Statistics and trends related to external sector

4. Overview of the dangers and benefits of trade and aid

5. Measures that can be adopted

Methodology

Information from the secondary sources had been used to prepare this report. Due to the time constraints and limitations, most of the literature review was eschewed in favor of a more informative approach. The information provided was collected from the internet and the publications from BBS, CPD and Bangladesh Bank. A more complete list of references will be found at the end of the report.

Limitations of the Study

The major limitation in preparation of this report had been the time constraint. The report was needed to be finished long before it was planned, and some important aspects of the report had to be left out. Should there have been more time, primary sources of data and a more in-depth analysis of the situation could’ve been made.

Another limitation had been the lack of information on some of the topic, or the lack of updated information. We tried to utilize the information of 2007 wherever possible, and we did so. However, the Foreign Trade Statistics, a publication of BBS – has been issued only till 2004-05. Similar issues had been faced throughout the collection of data for the report.

Bangladesh: an Overview

Bangladesh came into existence in 1971 when Bengali East Pakistan seceded from its union with West Pakistan. About a third of this extremely poor country floods annually during the monsoon rainy season, hampering economic development.

Despite sustained domestic and international efforts to improve economic and demographic prospects, Bangladesh remains a poor, overpopulated, and ill-governed nation. Although half of GDP is generated through the service sector, nearly two-thirds of Bangladeshis are employed in the agriculture sector, with rice as the single-most-important product.

Economic reform is stalled in many instances by political infighting and corruption at all levels of government. Progress also has been blocked by opposition from the bureaucracy, public sector unions, and other vested interest groups.

Bangladesh has made significant strides in economic sector since independence in 1971. Although the economy has improved vastly in the 1990s, Bangladesh still suffers in the area of foreign trade in South Asian region. Despite major impediments to growth like the inefficiency of state-owned enterprises, a rapidly growing labor force that cannot be absorbed by agriculture, inadequate power supplies, and slow implementation of economic reforms, Bangladesh has made some headway improving the climate for foreign investors and liberalizing the capital markets; for example, it has negotiated with foreign firms for oil and gas exploration, better countrywide distribution of cooking gas, and the construction of natural gas pipelines and power stations. Progress on other economic reforms has been halting because of opposition from the bureaucracy, public sector unions, and other vested interest groups. The especially severe floods of 1998 increased the country’s reliance on large-scale international aid. So far the East Asian financial crisis has not had major impact on the economy. World Bank predicted economic growth of 6.5% for current year. Foreign aid has seen a decline of 10% over the last few months but economists see this as a good sign for self-reliance. There has been 18% growth in exports over the last 9 months and remittance inflow has increased at a remarkable 25% rate. Export was $10.5 billion in fiscal year 2005 exceeding the target export of $10.4 billion. Target export for current year is $11.5 billion. An estimated GDP growth of 6.7% was predicted for FY 2006.

The 2007 estimated GDP growth rate of the country is 7.0%, GDP-per capita is $2,270.

The major import commodities of the country are machinery and equipment, chemicals, iron and steel, textiles, raw cotton, food, crude oil and petroleum products, cement etc.

The import partners of the country are (2006-07 July-February information) – China, India, Singapore, Japan, Hong Kong, Taiwan, South Korea, United States of America, Malaysia – in that order.

Bangladesh is one of the countries in the list of Least Developed Countries (LDCs) of United Nations. Least Developed Countries (LDCs or Fourth World countries) are countries which according to the United Nations exhibit the lowest indicators of socioeconomic development, with the lowest Human Development Index ratings of all countries in the world. A country is classified as a Least Developed Country if it meets three criteriahttp://www.un.org/special-rep/ohrlls/ldc/ldc criteria.htm based on:

1. Low-income (three-year average GNI per capita of less than US $750, which must exceed $900 to leave the list)

2. Human resource weakness (based on indicators of nutrition, health, education and adult literacy) and

3. Economic vulnerability (based on instability of agricultural production, instability of exports of goods and services, economic importance of non-traditional activities, merchandise export concentration, and handicap of economic smallness, and the percentage of population displaced by natural disasters)

The international market background: WTO and regional agreements

Since the establishment of WTO on 1^st January, 1995, Bangladesh has been playing an active role in the ongoing WTO negotiations with a view to protecting the legitimate claim and interests of LDCs in an extremely competitive global trading environment.

To protect the interests of LDCs, Bangladesh has been strongly pleading for duty-free and quota-free market access for all products originating from LDCs, exploring employment opportunities for the semi-skilled labor force abroad, enhancing market share for LDCs in the global trade, meaningful and effective trade related technical assistance, exemption of LDCs products from any anti-dumping, countervailing and safeguard measures, implementation of all special and differential (S&D) treatment provisions for LDCs, continuation of domestic support for low-income and resource poor farmers and subsidy for internal and international transport and freight charges with a view to reducing marketing cost, and developing trade remedial measures and compensatory mechanism to address the erosion of trade preferences etc.

At present the LDCs’ market share in the world export is about 0.6%.

In the recent Hong Kong declaration of WTO, a time-bound commitment has been made for the first time for duty-free and quota-free market access for products originating for LDCs. All LDCs including Bangladesh has been exempted from tariff reduction commitments.

Bangladesh also attaches equal emphasis on its bilateral and regional trade. In case of bilateral trade, Bangladesh has already taken major steps towards making free trade agreements with India, Pakistan and Sri Lanka. Nepal and Bhutan has also expressed interest in bilateral trade agreements with Bangladesh. Bangladesh is a member of several regional trade agreements including SAPTA. Some of these are mentioned below:

South Asia Free Trade Agreement (SAFTA):

With the aim to increase trade and economic co-operation among nations of SAARC, the South Asia Free Trade Agreement was signed on 6^th January on Islamabad, during the 12^th SAARC summit. According to this agreement, the developing nations of the region (India, Pakistan and Sri Lanka) will reduce the dutys and taxes to 0-5% within 2009 for the less developed countries. On the other hand, Bangladesh and other countries will reduce the dutys on commodities outside of the list of sensitive commodities to 0-5% within 2016. It should be mentioned that Bangladesh has 1254 commodities on its sensitive list. Bangladesh has provided the SAARC nations 5% duty up till March 2007, which will be increased to 10% on 1^st January 2008.

Asia-Pacific Trade Agreement (APTA):

The Bangkok agreement was made in 1975. Currently the members of this agreement are India, Sri Lanka, China, The Republic of Korea, and Laos People’s Democratic Republic. Later it was renamed to Asia Pacific Trade Agreement (APTA).

The last round of negotiation under this agreement was completed in 2004. It has been in effect since 1^st July, 2006. Under this agreement the member countries will provide duty advantages to each other.

There are other regional associations of significance, they are – The Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Co-operation (BIMSTEC), TPS-OIC, D-8; etc.

Trade scenario

The prime objective of the trade policy of Bangladesh is to strengthen the economy of the country while sustaining the shocks of rapid changes in global trade regimes, trade liberalisation and export-based development strategy. Consistent with the emerging trends of the market economy, Bangladesh has been pursuing a liberal trade policy. Starting from 1980s, Bangladesh has been pursuing liberal trade policy that opened the economy to a great extent. Extensive reform programmes have been implemented in trade regimes during the last two decades. Reforms have been initiated to dismantle both tariff and non-tariff barriers. With regards to steps towards trade liberalisation government has been pursuing a moderate protective policy only in consideration of certain sensitive areas like public health, security and religious bindings. Simultaneously, more liberal import and export policies and programmes have been adopted including reduction in tariff slabs.

Bangladesh pursued one-year export and import policies in the first half of eighties and two-year policies in the last half of eighties and the first half of nineties. Since then, five-year export and import policies (1997-2002) were formulated and implemented. After the termination of tenure of these time bound policies, the government has announced three-year export import policies (2003-2006). These policies are consistent with the agreement under Uruguay Round Accord, WTO and the principles of market economy on the one hand and maintaining favorable balance between exports and imports of the country on the other.

Export Policy and Programmes Implemented

Expanding global market economy and agreement with the WTO have opened up a wide range of opportunities for exports, on the one hand, and has posed a great challenge for a poor country like Bangladesh with underdeveloped technology and low capital base on the other. In the case of import, following gradual reduction of duty rates, domestic import-substitute industries have been increasingly facing tough competition. Export industries on the other hand have to survive and expand by competing with other countries. Bearing in mind this unfavorable situation, the Export Policy, 2003-2006 has been formulated. A strategy of export development instead of export promotion has been adopted in the Export Policy. In the Export Policy, export targets for FY 2003-04, 2004-05 and 2005-06 have been fixed at US$ 7,439.00 million, US$ 8,565.78 million and US$ 9,599.00 million respectively. But against the aforesaid export targets, the real export earnings during FY 2003-04 and FY 2004-05 amounted to US$ 7,602.99 million and US$ 8,654.52 million respectively. Considering export target and real export earnings for both the year, the export target for FY 2005-06 has been re-fixed at US$ 10,159.20 million. It is heartening that the export earnings for FY 2005-06 has exceeded the re-fixed target by 3.61 percent. Given that the measures prescribed in the export policy are implemented properly, exports will substantially increase despite all possible constraints.

World Trade Organization (WTO) and Bangladesh

Since the establishment of WTO on 1 January 1995, Bangladesh has been playing an active role in the ongoing WTO negotiations with a view to protecting the legitimate claim and interests of LDCs in an extremely competitive global trading environment. Bangladesh also attaches equal emphasis on its bilateral and regional trade.

To protect the interests of LDCs, Bangladesh has been strongly pleading for duty-free and quota-free market access for all products originating from LDCs, exploring employment opportunities for the semi-skilled labour force abroad, enhancing market share for LDCs in the global trade, meaningful and effective trade related technical assistance, exemption of LDCs products from any anti-dumping, countervailing and safeguard measures, implementation of all special and differential (S&D) treatment provisions for LDCs, continuation of domestic support for low income and resource- poor farmers and subsidy for internal and international transport and freight charges with a view to reducing marketing cost, and developing trade remedial measures and compensatory mechanism to address the erosion of trade preferences etc.

Along with other WTO members, Bangladesh has been playing an important role to bring WTO negotiations back on track after the Cancun setback in September 2003. The Sixth WTO Ministerial Conference was held in Hong Kong from 13-18, December, 2005. The major negotiating issues were, Agriculture, NAMA (Non-Agriculture Market Access), Services, WTO Rules, Trade Facilitation, Aid for Trade and specific development issues for LDCs. The main demand of LDCs was to get duty-free and quota-free market access to develop and developing countries declaring themselves in a position to do so. The issue was particularly important for LDCs including Bangladesh to raise their market share in the global trade. At present, LDCs’ market share in the world export trade is about 0.6 percent.

In the Hong Kong Declaration, a time-bound commitment has been made for the first time for duty-free and quota-free market access for products originating from LDCs. The major achievement for the LDCs in the Hong Kong Ministerial Conference is the commitment of duty-free and quota-free market access for at least 97 percent of products originating from LDCs to the developed countries and the developing countries declaring themselves in a position to do so. The duty-free list will be expanded gradually. The modalities in this regards will be worked out by 2006. However, the impact on other developing countries for according duty-free and quota-free market access to all products originating from LDCs will also be taken account. All LDCs including Bangladesh have been exempted from tariff reduction commitments. Besides, some other achievements of LDCs including Bangladesh are as follows:

§ Rules of Origin will be simplified so that LDCs can avail of the market access facilities;

§ LDCs have been given an extension of the transition period until 1 July, 2013 to provide protection for trademarks, copy rights, patents and other intellectual property under the TRIPS Trade Related Aspects of Intellectual Property Rights) Agreement. Earlier, an extension of the transition period for pharmaceuticals products was granted for LDCs until 1 January 2016. This has been extremely helpful for the expansion of exports;

§ LDCs will not be required to make commitments particularly under Trade Facilitation to the extent consistent with their individual capacities;

§ LDCs including Bangladesh have been allowed to maintain ‘Temporary Investment Measures’ up to 2020, if needed. In that case there will no obligations under the TRIMs (Trade Related Investment Measures) Agreement;

§ LDCs will be given technical and financial support under the Integrated Framework, Technical Co-operation and Aid for Trade Package;

Meanwhile, the government has already spelt out its ‘market access strategy’ with a view to reaping the meaningful benefit from the Hong Kong Declaration.

Industry and International Trade

Agricultural Products	rice, jute, tea, wheat, sugarcane, potatoes, tobacco, pulses, oilseeds, spices, fruit; beef, milk, poultry
Industries	jute manufacturing, cotton textiles, garments, tea processing, paper newsprint, cement, chemical, light engineering, sugar, food processing, steel, fertilizer
Industrial production growth rate	7.20%
Exports	$11.16 billion (2006 est.)
Exports-commodities	garments, jute and jute goods, leather, frozen fish and seafood
Exports-partners	US 25%, Germany 12.6%, UK 9.8%, France 4.9% (2006)
Imports	$14.75 billion (2006 est.)
Imports-commodities	machinery and equipment, chemicals, iron and steel, textiles, raw cotton, food, crude oil and petroleum products, cement
Imports-partners	China 17.7%, India 12.5%, Kuwait 7.9%, Singapore 5.5%, Hong Kong 4.1% (2006)

Trend in trade situation

§ High export growth (20.2%) and record high remittance flow (26.2%) contributed to robust export growth of 20.2% in July-March, 2007.

§ Higher rate of foreign exchange inflow and relatively lower rates of outflow led to record forex reserves of $4.53 billion (in April ’07).

§ For the third consecutive year, Bangladesh has been able to successfully cope with the post-MFA challenges.

§ However, as imports pick up and the sanctions on Chinese apparels come to an end by the end of 2007, Bangladesh’s export sector could come under some pressure.

Export Sector Performance in FY2007 (July-March)

§ Export earnings of $9065.8 million in July-March FY2007 was one and half billion dollar more than matched period of FY2006.

§ All major exports posted high growth rates in the first nine months of FY2007

RMG Growth : 21.1%; of which

– knitwear : 24.3%

– woven-wear : 18.2%

§ Frozen food : 15.9%

§ Leather : 9.1%

§ However, traditional exports such as raw jute(-5.3%) and jute goods (-8.4%) continued to experience negative growth.

Commodity-wise Decomposition of Export growth in FY2007

Disquieting Feature

§ Growth of export earning driven by volume growth, rather than price-growth.

§ Of the 20.2% growth in export earnings, 19.6% was contributed through rise in volume index and a meager 0.6% by rise in price index. This underpins the need for export diversification and product and process up gradation.

§ Some positive changes in prices for leather and frozen shrimp, but average prices of both woven and knitwear almost unchanged.

Import Sector Performance

Import of Some Selected Commodities (FY2006 vs. FY2007) in Value Terms

· Total import during July-March of FY07 amounted to $12393.5 million, a 17.2% growth over the corresponding period.

· Highest import was registered for textiles (11.6% of total) and capital machineries (11.2%), which are closely related to exports and investments.

Trends in import and export sector:

· Stagnation in L/Cs opened for textile fabrics, fabrics under b/b L/Cs and accessories: $2171.9 mln in FY07 (Jul-Apr) against $2164.82 mln in FY06 (Jul-Apr).

· Growth of import L/Cs opened for capital machineries, high in recent years, has slowed down (6.7% growth).

· Overall, growth of L/Cs opened during the first three quarters of FY2007 (14.5%) was lower than export growth (20.2%). This was likely to have positive impact on balance of trade and forex reserves.

· Trends in both imports and L/C openings indicate higher import growth in coming months.

· Phase out of quota imposed on Chinese apparels in EU and US and its implications for Bangladesh’s export of apparels.

· Revised EU Rules of Origin requiring change from stages of production to value addition criteria. GSP utilization rate must increase.

· The US is currently designing her offer list for the WTO DF-QF initiative for the LDCs (the so-called 97% : 3%). The TRADE Act 2007 (Tariff Relief Assistance for Developing Economies) is also being discussed. Bangladesh should lobby and prepare in view of these.

· WTO discussions in relation to GATS, particularly GATS Mode-4, are expected to have important implications for Bangladesh. Bangladesh should protect her own interests in domestic market (defensive interest) and enhance market access in foreign markets (offensive interest).

· Comprehensive policy required in view of potential market openings under the DF-QF initiative, SAFTA, APTA and BIMSTEC-FTA to make these commercially meaningful.

· The CPD RMG Study has identified a number of key areas for enhancing the competitiveness of Bangladesh’s RMG sector:

(a) Technology requisition and up gradation,

(b) Development of clusters,

(c) promotion of horizontal integration,

(d) compliance assurance,

(e) skill up gradation,

(f) market promotion and

(g) development of logistics and support services.

· Focused policy interventions required in each of the aforesaid areas.

Balance of Trade and Balance of Payment

Bangladesh’s Terms of Trade: FY2000-FY2006 (Base: FY2000 = 100)

Financial Year	Export Price Index	Import Price Index	Commodity Terms of Trade
FY2000	100.00	100.00	100.00
FY2001	102.40	107.52	95.24
FY2002	104.82	115.61	90.67
FY2003	107.44	124.57	86.25
FY2004	111.80	133.41	83.80
FY2005	115.75	137.77	84.02
FY2006	120.46	143.17	84.14

· Declining terms of trade: The Tot has come down from 100 in FY2000 to 84.1 in FY2006. Export indeed has lost about 15% of its purchasing power between FY2000 and FY2006.

· Further fall in Tot in FY2007 expected in the face of stagnating export price in FY2007 (only 0.6% rise) and high global inflation.

Trade balance recorded a smaller deficit of US$ 2,879 million during FY 2005-06 compared to the deficit of US$ 3,297 million during FY 2004-05. Despite large service deficit, the current account balance recorded a surplus of US$ 572 million during FY2005-06 against the deficit of US$ 557 million over previous year. This has happened due to larger current transfers of US$ 5,347 million during the reporting period. Despite a smaller decline in financial account of US$ 24 million, the overall balance recorded a significant surplus of US$ 365 million during FY 2005-06 against the surplus of US$ 67 million during FY 2004-05. This was mainly due to a significant increase in current account balance of US$ 572 million as well as capital account of US$ 242 million. The balance of payment from FY 2002-03 to FY 2005-06 and trade balance and current account balance are shown in table 6.12 and graph 6.3 respectively.

Graph: Trade Balance and Current Account Balance

Table: Balance of Payments

(In million taka)

Particulars	2001-02	2002-03	2003-04	2004-05	2005-06
Trade balance	-1768	-2215	-2319	-3297	-2879
Exports f.o.b. (including EPZ)1/	5929	6492	7521	8573	10422
Import, c.i.f. (including EPZ)	-7697	-8707	-9840	-11870	-13301
Services	-499	-691	-874	-870	-1110
Receipts	865	887	924	1177	1296
Payments	-1364	-1578	-1798	-2047	-2406
Income	-402	-358	-374	-680	-786
Receipts	50	64	63	116	134
Payments	-452	-422	-437	-796	-920
of which official interest payment	-161	-167	-175	-203	-201
Current transfers	2826	3440	3743	4290	5347
Official	69	82	61	37	34
Private	2757	3358	3682	4253	5313
of which workers’ remittances	2501	3062	3372	3848	4802
Current account balance	157	176	176	-557	572
Capital account	410	428	196	163	242
Capital transfers	410	428	196	163	242
Financial account	391	413	-31	784	-24
(i) Direct investment 1/	391	376	276	800	675
(ii) Portfolio investment	-6	2	6	0	32
(iii) Other investment	6	35	-313	-16	-731
MLT loans	733	918	544	940	921
MLT amortization payments	-435	-452	-397	-449	-489
Other long-term loans (net)	-42	-20	-41	-46	-58
Other short-term loans (net)	63	142	13	241	-256
Other assets	-87	-125	-125	-182	-245
Trade credit (net)	-253	-499	-321	-320	-805
Commercial Bank	27	71	14	-200	201
Assets	-90	217	86	-91	56
Liabilities	117	-146	-72	-109	145
Errors and omission	-550	-202	-279	-323	-425
Overall balance	408	815	171	67	365
Reserve assets	-408	-815	-171	-67	-365
Bangladesh Bank	-408	-815	-171	-67	-365
Assets	-276	-887	-235	-225	-554
Liabilities	-132	72	64	158	189

Foreign Aid – Background overview

Foreign Aid means any capital inflow or other assistance given to a country which would not generally have been provided by natural market forces. In Bangladesh, foreign aid serves to bridge the gap between savings and investments and make up the deficits in the balance of payments. Foreign aid is a major means of financing the country’s economic development. Economic literature generally classifies foreign aid into four main types. First, the long-term loans usually repayable by the recipient country in foreign currency over ten or twenty years. Secondly, the soft loans repayable in local currency or in foreign currency but over a much longer period and with very low interest rates. The softest are the straight grants often given to the less developed countries. Sale of surplus products to a country in return for payment in the country’s local currency, e.g., food aid from the USA under PL-480, is the third type and finally, the technical assistance given to the developing countries comprises the fourth type of foreign aid.

Foreign aid is essentially economic aid and is provided on a governmental basis. In Bangladesh the standard practice is to treat only the loans received on concessional terms and grants as foreign aid. Excluded from the category are fund transfers in the form of military assistance, aid provided by foreign private agencies, suppliers credit, export credit, foreign portfolio investment, foreign direct investment and hard-term borrowing with an interest rate of 5% and above and/or a repayment period of less than twelve years. The donors of foreign aid to Bangladesh include individual countries, multinational financial institutions and international agencies and organizations. Foreign aid to Bangladesh is classified on the basis of terms and conditions, source, and use. Accordingly, the various types foreign aid are loans and grants, or bilateral aid and multilateral aid, or food aid, commodity aid, project aid and technical assistance.

Food aid is the supply of food from the donor countries and organizations or payment to suppliers of food to Bangladesh by them. Donor payments of costs associated with food supply such as transport, storage, distribution, etc. are also considered as food aid. Likewise, commodity aid represents donor funding of the acquisition of commodities including consumer items, intermediate inputs and industrial raw materials. Sale of food and commodities imported under aid arrangements generates a counterpart taka fund in the government treasury. Projects or activities implemented with the help of that fund also fall under food or commodity aid programmes. Major commodities imported into Bangladesh under commodity aid programmes are edible oil, seeds, fertilisers and chemicals. Project aid is the provision of grants and loans for the financing of project costs. It also finances the import of equipment and commodities related to projects. In Bangladesh project aid relates to a large extent to the financing of projects included in the Annual Development Programmed (ADP). Technical Assistance, often seen as a part of project aid refers generally to foreign aid for the improvement of the institutional capacity, transfer of technology, import of expertise (foreign consultants and technicians), and development of human resources by providing training facilities, including foreign fellowships.

Motives for giving aid:

Humanitarian motives:

Thousands of people in Bangladesh are starving from poverty, malnutrition and natural calamities like cyclone, floods etc. So in order to help these people, western and European countries provides aids considering humanitarian needs.

Political motives:

The democratic countries like USA, UK, Australia provides aids to win the political alliance as well as communist like Russia to promote communism.

Economic motives:

If Bangladesh succeed in escaping from the ‘poverty’ tap and achieves faster rates of economic growth, they will be able to enter more fully into international trade providing growth in international trade.

Commercial motives:

Sometimes developed countries provides assistance and aids in the condition that Bangladesh will buy specified technologies and expertise from the donor countries or provide duty free access of their products to Bangladesh which is fully commercial.

Forms of Aids:

The United Nations considers that economic aid consists of outright grants and long term loans for non-military purposes. The chief aid giving countries, however, take a much broader view and include private capital investment and export credits. In fact, the term ‘aid’ is being increasingly replaced by the term ‘assistance’. Economic assistance is mainly of two terms:

· Foreign private investment:

1. Direct Private foreign Investment

2. Indirect Private foreign Investment

· Foreign Aid:

1. Technical Assistance

2. Project Aid

3. Commodity Aid

4. Emergency Assistance

5. Loans and Grants

6. Education Aid

7. Specialist Services

Foreign Private Investment:

This investment is done by non government or businessman of the foreign countries. Here there are two types:

Direct Private Foreign Investment:

Foreign direct investment or FDI refers to the transfer of financial and intangible corporate assets, including global market links, by non-residents who have an active participation and control in the management of the enterprise in which they invest may also be termed as private foreign capital. The foreign investors can in other countries either in the form portfolio investment or in the form of foreign direct investment. The former type of investment does not provide any voice in the management of the enterprise, whereas the latter type of investment entails an effective voice in the management of the business. So the investors, who like to have a control in the affairs of the forgoing business, will undertake FDI.

Traditionally foreign direct investment FDI, were in the form of whole or majority ownership. In recent times, however, there has been a proliferation of new forms of minority ownership including a variety of non-equity contractual arrangements. The variations forms of FDI are as follows:

1. Green field investment

2. Acquisition

3. Joint venture

4. Licensing/franchising

5. Counter trade

6. Co production agreements

7. Management contracts

Indirect Private Foreign Investment:

This type of investment is not directly done by the private investors, rather they invest indirectly. This type include portfolio investment where they posses less influence in the management of the business. For example- there so many buying houses in Bangladesh where the investors didn’t directly invest rather they are patronizing.

Foreign Aid:

Foreign aid refers to public foreign capital in cash or kind under provision of non-repayment. Economists have defined foreign aid as any flow of capital to LDCs whose objective must be non-commercial from the point of view of the donor.

Technical Assistance:

Technically advanced nations like USA, Japan, Germany, Australia and The Netherlands provides technical experts to advice and assist Bangladesh in her efforts to achieve economic growth. They also provide technical training to the people of Bangladesh so that those trained people can contribute to the development of the country. Technical assistance covers three activities:

• The provision of experts and advisors
• Training
• Supply of equipment associated with a particular training endeavor

Project Aid:

This type of aid is provided to run a specific designed and developed by the donors. For example- ‘Family planning project’, ‘Surjer Hashi Chinnito Parabarik Shashtho Clinic’ etc. Sometimes project aid also allocated on conditions that Bangladesh will have import from the donor countries.

Food Aid:

Food aid consists of agricultural commodities, invariably surpluses, from donor governments and agencies. Major food aid donors are the United state, Canada, the EEC – European Economic Community or “Common Market”, and the United Nations World Food Program as well as a number of private voluntary organizations. Recipients may be either governments or individuals, depending on the program. Food aid to Bangladesh is gradually declining as the country has given priority to increase domestic food grains production.

Emergency assistance:

Emergency aid is given in response to disaster like floods, earthquakes, droughts, or other natural calamities and to provide for the refugees created by such disasters or as a result of war.

Loans and grants:

Loans may be arranged on commercial terms i.e. market rates of interest or on concessionary terms i.e. at interest rates well below market rates. Grants and concessionary loans tend to take the form of official assistance, that is, they are supplied on government to government basis (bilaterally) or via multilateral organizations like World Bank, IMF, ADB etc.

Education Aid:

Most of the wealthier nations provide facilities Bangladeshi students and government employees to attend universities and colleges and provide them with scholarships. For example – ADB scholarships, AUSAID scholarship, Commonwealth scholarships, Monobusho scholarships. In addition, they send teachers and instructors overseas.

Specialist services:

The World Bank, The IMF, ADB and the United Nations as well as individual countries carry out economic surveys for, and offer a variety of financial, technical and advisory services to, Bangladesh.

Aid Donors to Bangladesh

The sources of aid to Bangladesh are classified in five broad categories:

1. Development aid committee (DAC) countries

Bangladesh receives major portions of its aid from DAC countries. During the period of 1971 to June 1992, the country has received a total aid of $8566.5 million from the DAC countries AC countries are: Australia, Belgium, Canada, Denmark, Finland, France, Germany, Italy, Japan, Netherlands, Norway, Sweden and U.K. & U.S.A.

2. International agencies

International agencies are the second largest source of foreign aid to Bangladesh. From 1971 to June 1992, the international agencies provided $2282.6 million as aid to Bangladesh. The agencies include: EEC, UNICEF, UN, IDA, ADB, IDB, OPEC etc. IDA has provided the highest amount of foreign aid ($707 crores) to Bangladesh.

3. Centrally planned countries

Another significant source of foreign aid of Bangladesh is the centrally planned countries. During the aforesaid period, the country has received a total aid of $50.8 million. Centrally planned are: Bulgaria, China, Hungary, Poland, Romania, USSR.

4. OPEC countries

OPEC countries also provide a large amount of aid to Bangladesh. During the period from 1971 to June 1993. OPEC countries provided $516.9 million aid to Bangladesh. The OPEC donors are: Saudi Arabia, UAE, Iraq, Iran, Kuwait etc.

5. Other sources

Bangladesh also gets aid from some other sources. The other sources include: India, Pakistan, Turkey Suppliers Credit, etc. from the above sources, Bangladesh has received $333.3 million during the period from 1971 to June 1993.

The roles and benefits of foreign aid

1. Poverty alleviation:

Aid helps for the immediate relief of poverty through Food for Work programs. But it can also help to relieve poverty in five other ways:

1. By contributing to growth, it can create the conditions for raising the incomes and consumptions of the poor.

2. It can achieve those results more directly, through specific projects or sectored activities.

3. It can improve poor people’s welfare through basic services – education, health, nutrition, housing or family planning program.

4. It can assist processes of social change, which gives asset to the poor.

5. It can support policy reforms that benefit the poor.

2. Supply capital for development project:

Bangladesh is a country of “capital-poor” or “low-saving” and “low-investment”. Per capita income of people is very paltry. As a result, the rate of savings and capital formation is very low. Due to low rate of capital formation sufficient capital can not be supplied from internal sources to finance development projects such as health or sanitation, education, protection of infant mortality, etc.

3. Development of infrastructure:

Foreign aid plays the dominant role for infrastructural development of the country. Construction of road, bridge, school, college, power plan hospital, etc. requires a bulk investment on a long-term basis. Foreign private investors are not interested to make investment in these spheres of economic activities. Moreover, the government also cannot meet the financial needs of these projects since they require very large capital investment and have long gestation periods. Under these circumstances only foreign aid can ensure the supply of required capital. Completion of these projects contributes to economi efficiency and productivity in the long run.

4. Required amount of investment:

Bangladesh was under the colonial rule for about 200 years but there was no major investment in this territory. Industrial development and economic emancipation were far away from the country. To get rid of this situation, the country requires huge investment. But the government is unable to make investment from internal sources. So foreign aid is inevitable to overcome the shortage of investment.

5. Technological knowledge:

Besides low saving and low investment, Bangladesh also suffers from technological backwardness. Technological backwardness is reflected in high average cost of production and low productivity of labor and capital due to unskilled labor and obsolete capital equipment. Foreign aid overcomes not only capital deficiency but also technological backwardness. It helps the importation of capital equipment and raw materials through project aid. All these accelerate economic development.

6. Industrialization:

Bangladesh is not in a position to provide the equipments, raw materials and other capital intensive goods for industrial up gradation. Foreign aid also helps in this regard. Under commodity aid, Bangladesh receive accessories for jute and textile mills, engineering and shipbuilding industries, raw materials for pharmaceutical industries, etc.

7. Development of natural resources:

Private enterprises are reluctant to undertake risky ventures like the exploitation of untapped natural resources and the exploitation of new ideas. Foreign aid assumes all risks and losses that go with the pioneering stage.

8. Agricultural development:

The economy of Bangladesh is dependent on agriculture to a great extent. Foreign aid also plays a positive role in agricultural development. Providing agro equipment, seeds, fertilized and other necessary facilities at a concessional rate requires a strong capital base. The government collects the necessary fund for this purpose through foreign aid.

9. Social development:

The above discussion brings to the light that foreign aid plays a pivotal role for economic development of Bangladesh. The creation of the country’s infrastructure, the establishment of new industries, the tapping of new resources, the opening of new areas, all tends to increase employment opportunities within the economy. The pressure of population on land is reduced and disguised unemployment may disappear. This is the social gain from aid.

10. Other reasons:

Other reasons include:

1. To meet the deficiency of consumer and industrial goods in the country
2. To curb inflation through import of food and other goods
3. To meet the balance of payments

Dangers of Foreign Aid

After 30 years of the country’s independence, the flows of external resources in the form of foreign aid still remain most critical for development and for attaining self-reliant Bangladesh. Due to shortage of capital and resources, the country has to rely on foreign aid. But foreign aid is not free from dangers. The dangers of foreign aid are as follows:

1. Influence on internal policy

The donors interfere in internal policy formulation of the country which is a threat for our sovereignty. Due to massive aid dependency, not only the external alignments of Bangladesh but also its domestic economic policies remain susceptible to the ever-growing pressures of the donor countries and agencies.

2. Tied up aid

Foreign aid leads to dependency because the donors insist on aid tying to the purchase of goods and services at costs much higher than the competitive world prices.

3. Investment in wasteful project

Foreign aid is often used for extremely wasteful projects which make large losses year after year. They absorb more local resources of greater value that their net output when the costs of administration, maintenance and replacement of fixed assets originally donated for the projects are taken into consideration.

4. Conflicting attitudes of donors

The aim of donors is officially declared to be to strengthen the economy of Bangladesh and in particular, to give away assistance to the poorest section of the population, but it can be very well noticed that there exists a very sharp difference the rhetoric and the practice of the donors’ aid policy. The aid rationale of the donor countries are more complex in reality and reflect a mix of both self-interest and altruism. The mix varies extensively among donors, depending on the factor endowments of the particular donor country, and its strategic interest in Bangladesh. Whilst the altruism of the aid policy of the donors emerges from moral and humanitarian considerations, their self interest is dictated primarily by two factors: Strategic interest of global, political and military in the region; and the enhancement of their commercial interest in Bangladesh.

5. Aid serves effluent’s interest

It is alleged that the benefits of foreign aid do not reach to the poor constituting the majority of population in Bangladesh. Much of it is siphoned off by the influential interest group.

6. Anti development attitudes

Aid dependence has also fostered certain anti-development attitudes. The process of development has become inextricably linked to the search for foreign funds spawning the widely held notion that there can be no significant developments with our external aid

7. Adverse effects on macro economy

Economists are also critical to the external aid because of its adverse macro economic effects. In Bangladesh, instead of complementing domestic savings and contributing to raising the rate of investment, foreign aid acted as a substitute for domestic savings and therefore, the gross domestic investment ratio as a percentage of GDP being barely 22%

8. Rations to the defense staff

Food aid (grants and loans) was 17% of the total foreign aid. Besides a few strictly poverty focused channels like FFW, VGD, GR etc. a large part of it’s has been used for subsidized food supply for the defense, police, BDR, urban middle class and industrial workers.

9. Seasonal and irregular employment

The number of jobs created through FFW, roads maintenance projects and the like remained seasonal and irregular.

10. Incurring to dissipate public sector

Most of the resources of project aid have been utilized in public sector project in which power development preempted the lion’s share of the project aid. 35 to 40 percent of electricity generated is dissipated (better to call stolen) through line loss, the highest in the world.

11. Misuse

Different studies on the efficiency of rural infrastructure development projects have shown that misuse was gigantic.

12. Political aim

As the analysis suggests that, there were a number of projects that were implemented purely on political consideration in order to muster political support during the undemocratic regimes.

13. Inflationary effect

In contrast to favorable impact of these projects on the pore, they had rather pernicious effects on the poor through high rates of inflation triggered by conspicuous consumption of those who were the beneficiaries of these prestige projects.

Benefits of depending on Foreign Trade than on Foreign Aid:

Western and EEC countries along with other developed nations can help Bangl