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An analysis of Savings and

investment in Bangladesh

By
Farhana Ahmed Tinny
Student ID: 2010-1-10-117
Sec: 01
Submitted To:

Dr. Mohammed Farashuddin

Table of contents:

Introduction.3
Domestic and National Savings in Bangladesh...3
Investment5
Recommendation and Conclusion9
References9-10

Introduction:
The economy of Bangladesh continued to demonstrate satisfactory growth performance along with
maintaining macroeconomic stability during FY2009-10 despite the global economic recession. The
economy was provisionally estimated to have grown at a rate of 5.83 percent, slightly higher than the
growth rate (5.74 percent) of FY2008-09. The key feature of the economic performance during
FY2009-10 was the sustained growth in agriculture sector coupled with moderate growth in industry
and service sector. Bangladesh was affected less by the slowdown in international trade than other
emerging Asian Economies and has maintained strong economic fundamentals, including a sound
fiscal stance. According to Bangladesh Bureau of Statistics (BBS) revised provisional estimate, GDP
growth (5.83 percent) was contributed by corresponding growths of agriculture, industry and services
sectors which grew by 4.67 percent, 6.01 percent and 6.38 percent respectively, indicating
satisfactory performances of all the three broad sectors of the economy. Investment gathered increased
pace as it reached to 24.96 percent of GDP (20.19 percent for private investment and 4.77 percent for
public investment) in FY2009-10, up from 24.37 percent in the previous fiscal year. The reasons for
such acceleration are the improvement of business environment, rebound of the slow growth of
private sector credit and sluggish import of capital machinery and industrial raw materials from the
second quarter of FY2009-10. With a moderate inflow in inward remittances, gross national savings
in FY2009-10 fell to 28.75 percent of GDP from 29.57 percent in FY2008-09. The per capita national
income (GNI) exceeded US$ 700 mark for the first time. The per capita GNI and GDP stood at US$
751 and US$ 685 respectively during FY2009-10.

Domestic and National Savings in Bangladesh:


According to the final estimate of Bangladesh Bureau of Statistics (BBS) the country had achieved
GDP growth of 5.74 percent in FY2008-09 amid unprecedented global financial crisis. BBS revised
the provisional estimate of GDP growth at 5.83 percent for fiscal year 2009-10. However, based on
updated trend of macroeconomic indicators, the Medium Term Macroeconomic Framework (MTMF)
projected 6.0 percent GDP growth for the same period.
Table 1 and graph 1 indicate year-wise domestic and national savings scenario for the last few years.
In FY 2002-03 the domestic and national savings as percentage of GDP were 18.63 and 24.87
respectively. In 2008-09 domestic and national savings reached to the percentage of 20.09 and 29.57
of GDP respectively. In FY 2009-10 the rates of domestic and national savings were assessed to be
18.99 and 28.75 percent of GDP according to the provisional estimates. From the table it is clear that
since FY2007-08, domestic savings as percent of GDP has been plummeting while growth of national
savings as percentage of GDP showed a positive trend.
Bangladesh has been considered as one of the lowest domestic savings rates among the developing
countries in general and South Asian countries in particulars. In the early 1990s domestic savings
performance of Bangladesh was in fact paralleled the budgetary performance. The national savings
rate was more or less stagnated in the first period of 1990s, which represents a reversal of the
macroeconomic gains of that period. But the domestic savings rates were more remarkable in that
period. In FY91, the domestic savings rate was 18.23 per cent of GDP which was much higher than
the average growth rate of the same period (14.12 per cent). The possible reasons responsible for that
scenario were weakening efforts for mobilization of public sector resources and import liberalization,
in the absence of a strengthening of domestic tax efforts after FY91.

30.00
25.00
20.00
Gross Domestic
Savings

Linear (Gross Domestic Savings)

Gross National Savings

15.00
Per cent of GDP

10.00
Linear (Gross National
5.00 Savings)

0.00

Graph I: Trends in Savings Rate (FY91-FY06)


TABLE 1:
Savings as per cent of GDP (FY91-06)
Savings as % of GDP

FY91-95

FY96-00 FY01-04

FY05*

FY06*

Gross National Savings

18.97

21.58

23.52

25.2

26.5

Gross Domestic Savings

14.12

16.72

18.16

20.0

20.7

Source: Computed from CPD-IRBD Database and Finance Division (2004)

The savings rate both domestic and national showed an increasing trend in the latter period of 1990s
compared to its previous period, although it did not show any drastic change. The domestic savings
rate is stagnated for last couple of years. In FY01 it was 18.00 per cent, stagnates at 18.27 per cent in
FY04. On the other hand, the national savings rate also increased marginally from 22.41 per cent in
FY01 to 22.49 per cent in FY04. The marginal increase of the latter is underpinned by increasing flow
of foreign remittances from the expatriate Bangladeshi workers. The prolonged stagnation of the
domestic savings may be largely explained by the deteriorating income distribution scenario in the
Bangladesh economy as the poor who demonstrate higher propensity to save are being deprived of
their proportionate share in incremental national income.
However, according to the finance ministry of Bangladesh, the national and domestic savings from the
years 2005-06 to 2009-10 has a significant change. Table 2.6 and graph 2.3 present year-wise
domestic and national savings scenario for the last few years. In FY 2002-03 the domestic and
national savings as percentage of GDP were 18.63 and 24.87 respectively. Domestic and national
savings reached to 20.09 and 29.57 percent of GDP respectively in FY 2008-09. According to
provisional estimates, the rates of domestic and national savings were assessed to be 18.99 and 28.75
percent of GDP in FY 2009-10. From the table it is clear that while growth of national savings as
percentage of GDP show a positive trend, domestic savings as percent of GDP has been plummeting
since FY2007-08.

Table 2: Saving as percentage of gross domestic product


FY
2005-06
2006-07
2007-08
2008-09
2009-10

Domestic Saving
20.25
20.35
30.31
20.09
18.99

National Saving
27.67
28.66
30.21
29.57
28.75

Graph 2: National and Domestic savings as percent of GDP


35
30
25
20
Domestic Saving
15

National Saving

10
5
0
2005-06 2006-07 2007-08 2008-09 2009-10

The Private savings in Bangladesh constitute the largest portion in the domestic savings that is largely
derived from the household savings, with a small proportion contributed by the corporate sector. The
public savings rate averaged about 2- 3 percent, which is better than most other South Asian countries,
but this is probably due to the relatively higher level of foreign aid received by Bangladesh (Agrawal,
2001). In order to enable a person to save the full amount he wants to save, access to appropriate
financial instruments, such as bank time deposits at reasonable interest rates, is obviously important.
Such access is not always available in developing countries such as Bangladesh, especially in the rural
areas. Since the financial reforms in the eighties in Bangladesh and the introduction of Grameen
(rural) banks, there has been a sharp increase in bank branches all over the country which may have
contributed to higher savings mobilization especially for the household or private sector.
The finance ministry also stated that the percentage of domestic and national savings has formed at
19.59 and 28.40 respectively which have been decreased considering last year. Ministry stated that
due to increase of living cost and decrease on foreign remittance, the national savings has fall.

Investment:
In FY 2002-03, the rate of total investment was 23.41 percent of GDP in which the shares of public
and private sector were 6.2 percent and 17.21 percent respectively. The rate of national investment
gradually picked up to 24.65 percent of GDP in FY 2005-06. After the period there was a fluctuation
of investment and in FY 2008-09 investment as percent of GDP declined to 24.37, in which the
shares of public and private sector were 4.7 percent and 19.67 percent respectively.

However, in FY 2009-10 investments picked up to 24.96 percent of GDP and the shares of public and
private sector were 4.77 percent and 20.19 percent respectively.
At the beginning of the nineties, the share of private investment in total investment was about 60
percent, which stood over 80 percent in FY 2009-10. An analysis of the investment data reveals that
while the contribution of public sector in total investment is gradually decreasing the contribution of
private sector investment is increasing steadily. The present government is planning and implementing
short, medium and long term plans to create an investment friendly environment and a competitive
market system which will ensure adoption of innovative technology and infrastructural facilities to
attract entrepreneurs and expand domestic market.
Table 3 and graph 3 show the year-wise investment as percentage of GDP for the last few years.
FY
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10

Total Investment
23.41
24.02
24.53
24.65
24.46
24.21
24.37
24.96

Public Investment
6.20
6.19
6.21
6.00
5.45
4.95
4.70
4.77

Private Investment
17.21
17.83
18.32
18.65
19.02
19.25
19.67
20.19

Graph 3: Investment as percentage of GDP


30
25
20
15

Total Investment
Public Investment

10

Private Investment

5
0

Bangladesh is now trying to establish itself as the next rising star in South Asia for foreign
investment. The government has implemented a number of policy reforms designed to create a more
open and competitive climate for private investment, both foreign and local. Bangladesh has been
quick to undertake major restructuring for establishing a market economy, with the major thrust
coming from the private sector. The country enjoys modest but steady economic growth. Its current
development strategy is based on the premise that the creation and distribution of wealth occurs
through the acceleration of growth driven by competitive market forces, with the government
facilitating growth and making a clean break from the practices of a controlled economy where
private investment is constrained. With this end in view, the government has been gradually
withdrawing its involvement in this industrial and infrastructure sectors and promoting private sector
participation.
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The government has moved speedily to translate its policy pronouncements into specific reforms. It
has been consistently pursuing an open-door investment policy and playing a catalytic rather than a
regulatory role.
Regulatory controls and constrains have been reduced to a minimum. The government has steadily
liberalized its trade regime. Significant progress has been achieved in reducing non-tariff restrictions
on trade, rationalizing tariff rates and improving export incentives. The introduction of VAT has
helped rationalization of the import tariff and domestic tax structures. The tariff structure and the
import policy are kept under constant review to identify areas where further improvements are called
for.
On the legal and administrative front, the government has initiated measures to give greater autonomy
and independence to the judiciary - a pre-requisite as viewed by investors, for the restoration of
confidence in the judicial system.
A permanent Law Reform Commission has already been set up to ensure greater transparency and
predictability in the way rules and regulations are made and implemented.
An Administrative Reform Commission to rationalize existing rules, regulations and procedures has
also been set up.
The Company Law has been updated and modernized. The Securities and Exchange Commission has
been established to oversee and regulate the operations of the stock market.
The financial services have been strengthened through enactment of the Banking Companies Act,
1991 and the Financial Institution Act, 1993. The Industrial Relations Act has been amended to
enhance labour market efficiency.
Motivated by the simple realization that state-owned enterprises are a drain on its scarce resources and
that these are generally inefficient, very costly and slow in responding to changing markets and
consumer desires, the country has embarked on a privatization programme, offering substantial
opportunities for international investors.
In order to entice investors, the government has put in place an extensive programe of
incentives, which include :
No ceiling on investment.
Tax-holidays.
Tax-exemption and duty-free importation of capital machinery and spare parts for 100% exportoriented industries.
Residency permits for foreign nationals.
Capital, profit and dividend repatriation facilities.
Hundred percent foreign equity allowed.
Exemption of income tax up to three years for expatriate employees.
Term loans and working capital loans from local banks allowed.
Reinvestment of repatriable dividends treated as new investment.
Double-taxation avoidance, as per bilateral agreements already concluded.
Tax exemption on the interest payable on foreign loans and on royalties and technical know-how
fees.
Open exchange controls.
Multiple-entry visas for foreign investors.
Investors can take advantage of the generalized system of preference, which allows duty-free
access to American, European and Japanese markets.
Taka is convertible for current account transactions.

The Country also offers:


Extremely competitive labour costs, perhaps the lowest in Asia.
Easily trainable workforce of 56 million.
A large domestic market, with disposable income growing especially among the middle class.
strategic location as the bridge between South and East Asian high-growth regions as well as
links with other markets e.g. India, Pakistan, Malaysia, Singapore etc.
Low land and energy costs.
Good road/bridge/rail infrastructure, which are being improved; two sea-ports being further
developed.
Enjoys Most Favoured Nations status.
Legal protection to foreign investment against nationalization and expropriation.
Equitable treatment with local investors regarding indemnification, compensation etc.
All sectors of industry (except five) are open for private investment. The five sectors reserved for
public investment only are defence and defence production, nuclear energy, extraction from reserved
forests, security printing and mint and air transportation (some domestic routes and international air
cargo already opened for private investment.) and railways.
Some of the foreign private investment opportunities are:
Direct (100%) foreign investment or joint venture investment in the Export Processing Zones
(EPZs) or outside EPZs (with the exception of the five industries mentioned earlier).
Portfolio investment by purchasing shares in publicly listed companies through the stock
exchange.
Investment in infrastructure projects such as power generation (private power generation policy
announced); oil, gas and mineral exploration, telecommunication, ports, roads and highways.
Outright purchase or purchase of shares of state-owned enterprises, which are under process of
privatization.
Investment in private EPZ (Private EPZ Act recently passed).
Foreign investment is particularly welcome in the export-oriented industries such as textiles, leather
goods, electronic products and components, chemicals and petrochemicals, agro-based industries,
green jute pulp, paper, rayon products, frozen foods (dominated by shrimp farming), tourism,
agriculture, light industries, software and data processing.
Foreign investment is also desired in high technology products that will help import substitution or
industries that will be labour as well as technology intensive.
The country's drive for foreign investment is being spearheaded by the Board of Investment, which
was created to facilitate the setting up of manufacturing and other industries in the private sector, both
local and foreign. It is a promotional organization dedicated towards providing investment assistance
to all investors.
The Board is headed by the country's Prime Minister and it includes Ministers and Secretaries from
the concerned ministries as well as representatives from the private sector.
The Board has launched an investment promotion drive at home and abroad to attract investors. The
BOI has been assisting in the implementation of new projects as well as providing services.
Bangladesh is on the verge of a significant breakthrough in terms both of international investor
confidence and significant inflow of new investment funds.

Recommendation and conclusion:


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IMF has forecasted world economic growth at 4.8% and 4.2% in 2010 and 2011 respectively (World
Economic Outlook: October, 2010). In Bangladesh, growth has been consistent
1. In spite of recession, macro-economic stability held firm
2. GDP growth is 5.8% in FY 2009-10 2
3. Average GDP growth in last 5 years is 6.2%
4. Albeit global meltdown and devastating natural disasters, Bangladesh achieved satisfactory growth
indicating innate resilience of the economy.
Notable changes have taken place in market capitalization and general price index due to increase in
number of general investors, limited supply of securities and investors expectation for excess profit.
Such as on 31 October 2010, the DSE General Price Index was recorded at 7957.1 with 75.4%
increase over the same on 31 October 2009, The P/E ratios of some south Asian countries in October
2010 are: Bangladesh (Dhaka) 28.2, India (Mumbai) 23.0, Pakistan (Karachi) 8.00 and Sri Lanka
(Colombo) 25.2. Considering above all the government might take following action for better national
savings and more domestic and foreign investment:
1. Ensuring further coordination between Bangladesh Bank and DSE.
2. Strengthening the surveillance activities of SEC.
3. De-mutualisation of stock exchanges (separation of ownership, management and trading
activities).
4. Ensuring proper implementation of Insurance Development and Regulatory Authority Act,
2010.
5. Establishment of a monitoring authority in a bid to develop Financial Reporting (Accounting
and Audit).
With a view to achieving 8% GDP growth within FY2014-2015, additional foreign assistance is
required for investment in infrastructure projects including easing power crisis. Accordingly,
government has taken steps to mobilize loans on concessional terms.

References:
Savings and Growth in Bangladesh, [online]. Available at:
http://findarticles.com/p/articles/mi_qa5501/is_200904/ai_n31511871/pg_3/?tag=content;col1
[accessed: 5th August 2011].
Bangladesh: A new horizon for investment, [online]. Available at:
http://www.discoverybangladesh.com/meetbangladesh/investment.html [accessed: 4th August 2011].
Finance Division, Macroeconomic Scenario of Bangladesh, [online]. Available at:
http://www.mof.gov.bd/en/budget/me/mes_en_july_sep_10.pdf?phpMyAdmin=GqNisTr562C5oxdV
%2CEruqlWwoM5&phpMyAdmin=XRGktGpDJ7v31TJLuZ5xtAQmRx9 [accessed: 4th August
2011].
Finance Division, macroeconomic Situation, [online]. Available at:
http://www.mof.gov.bd/en/budget/11_12/ber/en/Chapter-1%20_Eng-2010_.pdf?
phpMyAdmin=XRGktGpDJ7v31TJLuZ5xtAQmRx9 [accessed: 5th August 2011].
BBC News,Expats Boots Bangladesh Economy, [online]. Available at:
http://news.bbc.co.uk/1/hi/world/south_asia/8240938.stm [accessed: 5th August 2011].

The journal of developing areas, 2009 (Vol 2) [online]. Available at: http://muse.jhu.edu/login?
uri=/journals/journal_of_developing_areas/v042/42.2.agrawal.html [accessed: 5th August 2011].
Bangladesh Economic Update,[online]. Available at:
http://www.unnayan.org/reports/meu_Nov_2010.pdf [accessed: 6th August 2011].

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