Independent University, Bangladesh

Introduction to Business (BUS 201) Sec: 02 Spring 2010

Submitted to: Mr. Mohammad A. Arafat Lecturer School of Business

Submitted by: 0930083: Falil Mohiuddin Gaalib

Submission date: April 09, 2010 Contents:

01. Introduction 02. Analysis and Summary of GDP and GDP Growth Rate 03. Analysis and Summary of Inflation Rate 04. Analysis and Summary of Unemployment Rate 05. Indication of Bangladesh Economy 06. Areas Bangladesh Has Progressed 07. Areas Where Development Is Backward Going 08. Areas Bangladesh Need to Focus On 09. Sources 01 02 05 07 09 10 12 13 15

Introduction: Bangladesh has made significant strides in its economic sector since its independence in 1971. To meet the needs of its increasing population, which is currently around 140 million, Bangladesh has made major strides to meet the needs of its increasing population, through increased domestic production, controlled inflation, and lowerd unemployment rate. Economy of Bangladesh is mostly agricultural-based. Currently, Bangladesh is the third largest rice producing country in the world. The land is devoted mainly to rice and jute cultivation, although wheat production has increased in recent years, the country is largely selfsufficient in rice production. Bangladesh's predominantly agricultural economy depends heavily on an erratic monsoonal cycle, with periodic flooding and drought. Although improving, infrastructure to support transportation, communications, and power supply is poorly developed. The country has large reserves of natural gas and limited reserves of coal and oil. While Bangladesh's industrial base is weak, unskilled labor is inexpensive and plentiful. Bangladesh is maintaining a moderate inflation rate during last few years despite rise in the prices of various commodities in the international market. The inflation rate in Bangladesh is the second lowest among the four major South Asian countries, which is below the inflation in Pakistan and Sri Lanka. The rate of labour force in Bangladesh grew faster than the population and had almost doubled between the year of independence and mid 1990s. The employment on man-year basis has, however, increased and the absolute unemployment, as well as underemployment had reduced. Even though more than one-third of the employed persons both at the national and rural levels is underemployed, employment has risen drastically recently.

Analysis and Summary of GDP and GDP Growth Rate Year 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 GDP (Billion) $ 144.5 $ 155.1 $ 167 $ 175.5 $ 187 $ 203 $ 230 $ 238.2 $ 258.8 $ 275.7 $ 304.3 GDP Growth Rate 4.6% 4.7% 5.5% 4.0% 5.2% 5.3% 5.6% 4.8% 5.3% 4.9% 5.7%

As Bangladesh was one of the world's poorest, most densely populated, and least developed nations, the world community thought it had a solution for Bangladesh. It poured billions of dollars of economic aid to bolster the country's economy. Many non-governmental organizations also came forward to help. Despite the tremendous influx of foreign aid, the country's overall economy for the general people didn't improve much even after few decades of its existence as an independent state. It's not to say that Bangladesh hasn't made any improvement. The country's economy is said to have grown at a rate of around 5 per cent a year over the past decade. But the general public benefited little from it since most of the gain was forfeited by the privileged few and part of it was offset by the population growth. The amazing result of the aid money was the creation of an unprecedented number of billionaires in the country. However, the most troubling fact of all, instead of making advances in industrialization, its core industrial base continued to dwindle, though the country could claim gains in certain service industries like garments manufacturing. Besides, Agriculture with the cultivation of rice being the most important activity in the economy, could not grow due to cyclones and floods, the inefficiency of state-owned enterprises, a rapidly growing labor force that cannot be absorbed by agriculture, delays in exploiting energy resources, inadequate power supplies and political disturbances. But economists question the viability of Bangladesh economy based on those service industries alone. Besides, under the current globalization process, the country is not likely to sustain them for too long. Although the CIA World Factbook came up with an estimate of Bangladesh's GDP or annual per capita income to be $1,700$2,100 for last 5 years, the country is still one of the most impoverished countries in the world. The simple answer to what went wrong is its corrupt political system that has miserably failed to implement the kind of changes required for turning the country around. The world pretty much knows how corrupt Bangladesh is - Transparency International has rated it as one of the most corrupt countries of the world for four consecutive years since 2001. Here is an example of the extent of corruption in the country. Of the billions of dollars the world sent to Bangladesh for its economic development, only a mere 25 per cent had gone towards that purpose. The rest of the money was one way or another misappropriated by the privileged. Professor Abul Barkat, the Secretary General of the Bangladesh Economic Association, in his report of February 10, 2001, documented this astonishing fact. The presence of various NGOs in the country has no doubt made a difference, but the economic effect is not as great as it is

advertised. Here is another example. Bangladesh had inherited some industries, which were immediately nationalized at independence. Later the elites, after having acquired authority over them, used these industries for their own personal gain and put them in a precarious bankrupt situation. As a result, thousands of industries from small to large have already closed estimates put the figure close to 10,000. What happened in the field of education and healthcare is no different either. The overall quality of education in the country has deteriorated to such an extent that every year the so-called elites send their children to schools abroad. But, except those who feel they could reap a big economic benefit by going back, very few of them return to the country. The medical facilities are so inadequate and antiquated that the affluent citizens always seek healthcare outside the country. Additionally, there is a more serious and challenging situation the country faces now - the crime rate. The crime rate has risen so much that in 2002 the government felt obligated to deploy the army to suppress it. But evidently that made little difference as the crime in the country continued to rise day by day. Therefore, for improving the economy of Bangladesh a number of measures must be taken before the situation gets out of hand. These most obvious measures are: full democratization of its institutions including the judiciary, control of corruption in the government, adoption of appropriate economic policy, improvement of its education and healthcare system, and especially control of the crime in the country. Without addressing these issues effectively, Bangladesh couldn't be expected to come out of its poverty.

Analysis and Summary of Inflation Rate Year 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Inflation Rate 4.5% 4.0% 9.0% 7.0% 9.0% 5.8% 5.8% (2001) 3.1% 5.6% 6.0% 6.7%

The control of inflation has become one of the dominant objectives of government economic policy in many countries. As Bangladesh is a developing country, inflation rate plays a vital role for the development of Bangladesh. Inflation rate is directly related with the consumer price index (CPI) which affects the standard of living of the people in Bangladesh. In the year 2000, inflation rate was 9.0% and this high rate of inflation brought different types of havoc in the life of general people. It forced people to buy less food and use less services from the domestic market. But around in 2001, the Bangladesh Bank used monetary and fiscal policy to control the rate of inflation. Through monetary policy, the government increased the interest rates on money it lends to banks. Banks passed this increase on to the borrowers, which slowed the economy as businesses and households borrowed less. They also raised the mortgage interest payment will reduce homeowners' real effective disposable income and their ability to spend. Increased mortgage also cost reduce market demand in the housing market. Business investment also fell, as the cost of borrowing funds increased. Some planned investment projects became unprofitable and, as a result, aggregate demand fell. Through fiscal policy, the government raised direct taxes which caused a fall in disposable income. They also reduced government spending which increased the rate of leakages from the circular flow and reduced injections into the circular flow of income and reduced demand pull inflation at the cost of slower growth and little unemployment. This resulted in a period of disinflation from 2001 as the rate of inflation started to decline. In 2003, it has decreased to 3.1% which is considered to be quite normal. When the government removed monetary and fiscal policy to increase growth in the other sectors, the rate of inflation started to rise again. In 2006, when the rate of inflation was last recoreded, it raised to 6.7%.

Analysis and Summary of Unemployment Rate Year 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Unemployment Rate NA% 35.2% 35.2% (1996) 35.2% (1996) 35.2% (1996) 35.2% (1996) 35% 40% 40% 40% 2.5%

In the year 2000, Government made a bugdet for removing poverty and illetarecy from Bangladesh, which was a challenage in twenty-first century for the present government. But severe floods of 1998 increased the country's reliance on large-scale international aid and it brought high inflation rate to the product market. For that reason, so far the East Asian financial crisis has not had major impact on the economy. Moreover, people on the rural areas didnt believe in education. They didnt understand the importance of education. So, there was a huge number of illeterated people on the working population. It was difficult for them to get good jobs at that time; in fact, most people remained unemployed which brought a high rate of unemployment in the economy of Bangladesh. The government introduced some programs like food for education to make them aware of the situation. Recently, more people have started to believe in education and slowly, they were getting the result. During 2003-2005, the unemployment rate remained constant at 40% which was a severe threat for Bangladesh but since no research was undertaken during that period, it remained unconfirmed. But in 2006, the unemployment rate decreased dramatically to 2.5% which is hard to believe but probably the truth. It is because $25 billion were invested in the country which created 1.5 million job oportunities, mostly for women and especially in the garment industries which grew at doubledigit rates through the last few years. Despite the country's politically motivated general strikes, poor infrastructure, and weak financial system, Bangladeshi entrepreneurs have shown themselves adept at competing in the global garments marketplace and Bangladesh's exports to the U.S. surpassed 10526 million US dollars. Bangladesh has done less well, however, in expanding its export base - garments account for more than three-fourths of all exports, dwarfing the country's historic cash crop, jute, along with leather, shrimp, pharmaceuticals and ceramics.

Indication of Bangladesh Economy

Indicators National Accounts
GDP (million $) Growth (%) Per Capita GDP $ 44034 5.2 348 19.67 1.63 15.88 8.54 45713 4.9 357 19.35 3.24 15.60 3.19 47125 5.9 363 19.49 6.92 15.40 4.76 46988 5.3 362 25 3.1 26.2 7.4 47571 4.4 361 24 0 26.7 6.5 51914 5.3 389 23.5 3.1 27.2 7.3 56498 6.3 418 23.1 4.1 27.7 7.6 60382 6 441 22.3 2.2 28.3 8.3 62021 6.7 447 21.8 4.5 29 9.6 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06

Agriculture
Share to GDP (%) Growth Rate (%)

Industry
Share to GDP (%) Growth Rate (%)

Money and Banking

Money Supply (million US$) Money Supply (M2) (million US$) Total Deposits (million US$) Bank Credit (million US$) Exchange Rate (US$) As % of GDP Investment Foreign Assistance (Net) Gross Domestic Savings 9524.86 2.0 7666.08 10145.6 1.8 8094.05 10850.73 1.9 8425.76 10848.78 2.0 8456.26 11011.7 2.1 8638.34 12150 2.2 9457 13581 1.0 11044 14178 1.3 11698 15821 1.2 12201 3495 11890 11440 61229 45.46 3589 13114 12275 67210 48.06 3952 14860 14109 75652 50.31 4083 15427 15708 845546 53.96 4207 17171 16020 940521 57.43 4619 19688 18407 1075688 57.90 5178 22032 20592 1198890 58.90 5786 24688 23226 1404093 63.50 6484 26871 24980 1628427 69.08

Savings and Investments

Price Trends
CPI (1985-6=100) % Change in CPI 112.96 8.66 120.94 7.06 124.31 2.79 126.72 1.94 130.26 2.79 135.97 4.38 143.90 5.83 151.46 6.48 164.21 7.17

Areas Bangladesh Has Progressed

Natural Gas: Natural gas production in Bangladesh has more than doubled from a decade earlier. Natural gas reserve estimates vary widely for Bangladesh. Oil & Gas Journal (OGJ) reported that Bangladesh had 5 trillion cubic feet (Tcf) of proven natural gas reserves as of January 2006, down significantly from OGJs January 2005 estimate of 10.6 Tcf. It is not clear why the large downgrade of Bangladeshs natural gas reserves occurred. In mid-2004, estimates from stateowned Petrobangla put net proven reserves at 15.3 Tcf. Bangladeshs Ministry of Finance estimated in 2004 that the country holds 28.4 Tcf of total gas reserves, of which 20.5 Tcf is recoverable. In June 2001, the U.S. Geological Survey estimated that Bangladesh contains 32.1 Tcf of additional undiscovered reserves. While estimates of the countrys reserves vary, natural gas is Bangladeshs only significant source of commercial energy. The government of Bangladesh estimates that natural gas accounts for 80 percent of the countrys commercial energy consumption. In 2004, Bangaldesh produced 463 billion cubic feet (Bcf) of natural gas, up from 429 Bcf in 2003 and more than doubling the 1994 level. Despite increasing production levels, Bangladesh has never been a net exporter of natural gas. Given the uncertain size of the countrys natural gas reserves, the government has been reluctant to export natural gas and has instead focused on meeting current and future domestic energy needs. Exploration and Production: Natural gas exploration and production is dominated by three state-owned companies, all of which are subsidiaries of Petrobangla. Bangladeshs largest gas production company, Bangladesh Gas Fields Company Ltd. (BGFCL), operates the Sylhet, Kailashtila MSTE, Kailashtia, Rashidpur, and Beanibazar gas fields. From these five fields, BGFCL produces 810 million cubic feet per day (Mmcf/d), or roughly half of the countrys total natural gas production. The Sylhet Gas Field Company Ltd. (SGFCL) is Bangladeshs second largest production company, producing 162 Mmcf/d of natural gas. SGFCL operates the Sylhet, Kailashtila MSTE, Kailashtia, Rashidpur, and Beanibazar gas fields. The third state-owned company involved in natural gas production and exploration is BAPEX, which produces about 58 Mmcf/d of natural gas from the Salda and Fenchuganj fields. To encourage natural gas exploration, the government opened the natural gas sector to foreign investment in 1993, after initiating the First Bidding Round of Production Sharing Contracts. Foreign companies today produce 501 Mmcf/d of natural gas from four gas fields. The leading foreign producer is

Chevron, which produces 331 Mmcf/d from the Jalalabad and Moulavibazar fields. Chevron also expects to begin producing an estimated 300 Mmcf/d of natural gas from the Bibiana field in October 2006. The UKs Cairn Energy is the second largest foreign natural gas production company, producing 146 Mmcf/d of natural gas from Bangladeshs lone offshore gas field at Sangu. Canadas Niko Resources has been involved in disputes with the government after two blowouts that occurred in 2005 at the companys Chattak (formerly known as Tengratila) gas field. There are several other fields that may prove to hold additional natural gas resources. Petrobangla estimates that the Bibiana field, currently operated by Chevron, may contain as much as 2.4 Tcf in recoverable natural gas reserves. Offshore natural gas fields also present large possible reserves, although minimal offshore exploration has occurred to date due to lingering border disputes with India and Myanmar. Coal: The government of Bangladesh is hoping to exploit its mostly untapped coal reserves to relieve pressures on the countrys depleting natural gas reserves. Bangladesh has small coal reserves, and has consumed little coal in the past. Bangladesh began commercial coal production in April 2003 with the opening of the Barapukuria Coal Mine, which is expected to produce one million short tons of coal per year (Mmst/y), principally for electricity generation. This mine is being used to fuel the 250-MW Barapukuria Coal-Fired Power Plant in Parbotipur, which began commercial operation in January 2006. Another possible coal mining project at Khalashpir is under consideration as well. Despite Bangladeshs small reserves, the government has recently promoted the development of coal to ease its reliance on natural gas for power generation. Bangladeshs coal reserves have so far not been developed, mainly owing to a lack of domestic financing. To attract investment, the government has opened the coal sector to foreign bidding. Although estimates vary, Bangladeshs Energy Ministry judges that the country has up to 2.7 billion short tons of high-quality coal reserves. According to the latest EIA figures, in 2004 Bangladesh has no domestic coal reserves or production. The government is currently crafting a new national coal policy that will govern foreign involvement in Bangladeshs coal sector. Some analysts anticipate the new coal policy will hike the royalty rate on coal projects from 6 percent to 16 percent and place limits on coal exports from the country, among other guidelines.In July 2005, UK-based Asia Energy Corp. (AEC) submitted a proposal to develop a coal mine in Bangladeshs Phulbari region. According to a Scheme of Development and Feasibility Study submitted to the government, AEC declares that the Phulbari site contains an

estimated 572 million short tons of recoverable coal reserves. The initial investment in the project would be $1.4 billion, and the open-pit mine is expected to produce 15 Mmst/y of coal to fuel a planned 500-megawatt power station. AEC is awaiting formal approval from the government, which hasdeclared that it will not approve any new coal development projects until its new coal policy isenacted. AEC also faces a number of other obstacles in gaining approval for the project. According to the Feasibility Study submitted by Asia Energy, up to 40,000 people would gradually be relocated away from the Phulbari area that currently live on or near the planned mining locations.

Areas Where Development Is Backward Going Oil: Bangladesh has small oil reserves and imports almost all of its crude oil and petroleum products. According to Oil & Gas Journal (OGJ), Bangladesh has 28 million barrels of proven oil reserves as of January 2006, down from 56 million barrels in 2005. The country produced an estimated 4,000 barrels per day (bbl/d) of oil in 2005, flat from the previous year. Bangladeshs relatively low level of domestic reserves and production capacity make it a net oil importer, as the Bangladesh Energy Data, Statistics and Analysis - Oil, Gas, Electricity, Coal 8 consumed an estimated 91,000 bbl/d of oil in 2005. Exploration and Production: To date oil exploration has been rather unsuccessful in Bangladesh, with most companies choosing to focus instead on the countrys plentiful natural gas reserves. Exploration and production activities are primarily carried out by the Bangladesh Petroleum Exploration and Production Company (BAPEX), a subsidiary of the state-owned Bangladesh Oil, Gas & Mineral Corporation (Petrobangla). However, the country has also initiated several Production Sharing Contracts (PSCs) with foreign oil companies and has employed tax incentives to attract foreign company involvement. In 1993, after the formation of a new National Energy policy, the government of Bangladesh divided its territory and offshore sites into 23 blocks and opened them to foreign bidding for oil and gas exploration. During the First Bidding Round in 1993, eight blocks were awarded to four companies through PSCs. In 1997 during the Second Bidding Round, three PSCs were awarded covering four additional

blocks. The government planned to hold a third round of bidding focusing on the offshore Bay of Bengal region in 2006, but it has so far been delayed. Before new bidding is opened, the government will complete a geological and seismic survey to identify potential exploration sites. Bangladesh must also accurately mark its deep sea territory and settle ongoing maritime border disputes with India and Myanmar. Refining/Downstream: According to OGJ, Bangladesh has 33,000-bbl/d of crude oil refining capacity at Eastern Refinery Ltd.s (ERL) facility at Chittagong. The ERL complex is a subsidiary of the state-owned Bangladesh Petroleum Corporation (BPC). Electricity: Almost all of Bangladeshs commercial electricity supply comes from natural gasfired plants. In 2004, Bangladesh had 4.7 gigawatts (GW) of installed generation capacity, up from 3.6 GW in 2002. 95 percent of this capacity was conventional thermal power (primarily natural gas) and theremaining 5 percent hydroelectric power. Electricity generation per capita is one of the lowest in the world, at about 155 kilowatt-hours (kwh) in 2005. According to the World Bank, only 32percent of the population has access to electricity, primarily in the more developed eastern zone of the country. Since much of the country is disconnected from the national electricity grid, noncommercial sources of energy such as biomass are estimated to represent more than half of Bangladeshs energy consumption.

Areas Bangladesh Need To Focus On

Education: Education is the backbone of a nation. The rate illiteracy in Bangladesh is very high. More than 25% people of Bangladesh have no light on knowledge and education. Due to lack of education, the number of skilled labor force is very poor compare to the requirement in the production sectors. Thus the demand of skilled labor force is increaseing day by day. If proper light of education is given to these people, the lack of unskilled labor will be deminished. More unemployed people will be employed as skilled labor which will reduce the unemployment rate as well as help to increase the GDP.

Agriculture: The rate of population in Bangladesh is increasing rapidly. But the production in agricultural sector is not fulfilling the needs of these huge population, so the extra amount of agricultural products are being imported from the foreign countries which possess a negative effect on the balance of payment. If government can help the agricultural sectors with providing better technology and skilled labor, the imported amount of agricultural products can be easily produced inside the country. Garments: The cost of production in garments sector is very cheap compare to most of the countries in the world. If we can utilize the labor force and available technologies to produce good quality products, it will definitly increase exports which will bring positive effects in the balance of payment. Leather: Bangladesh has bright future in the leather sector. Due to lack of proper technology it lags behind. Leather is not only used to produce domestic product but it can also be exported. If the government can help the leather industries by providing subsidies and with latest technology, leather export will rise to a very high extent. Electricity: The growing population of the country requires more electricity than what the country can offer. Since the population is likely to rise, more electricity has to be produced for the well-being of the people in the country. Fishing: Due to lack of knowledge, fishermen catches small fishes and sell them in the market. If they get the proper knowledge about fishing, these small fishes will lay they eggs after they grow up and it will have a multiplier effect. Small Industries and Cottage: Putting more focus on small industries and cottage can be beneficial to the country as well. Pharmaceuticals: It is a business that saves life. Many countries have progressed a lot with pharmaceutical industries and if this intustry can take Bangladesh one step ahead as well.

Ceramics: Ceramic industries has recently showed so good progress. It is believed that the ceramic industries can to create a good image of Bangladesh in the world market. Jute: Before the collapse of just industries, jute from Bangladesh was know to be one of the best in the world. After the collapse, it couldnt progress enough. Some experts believe that it can again take its previous established position in the world market.

Sources: Bangladesh Bureau of Statistics The World Bank IMF Fact Book Ministry of Finance Bangladesh Bank Wikipedia Export Promotion Bureau Economic Trends and Bangladesh Economic Survey Bangladesh Sangbad Sangstha Oil and Gas Journal International Gas Report BBC Metropolitan Chamber of Commerce and Industry, Dhaka