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CHAPTER VI

PRIVATE SECTOR

6.1 Introduction

6.1.1 There is now a growing realisation that a vibrant and dynamic private sector is the key to economic progress and sustained growth. The East Asian miracle exemplifies as to how the government can accelerate progress as a partner and as a facilitator. Developing countries, including Bangladesh, have come to increasingly rely on market forces to guide their development strategy. Efforts are being focused on the promotion and supporting of the private sector and creation of an enabling environment for it to flourish and maximise its contribution to economic progress within a business friendly and equitable framework. Bangladesh has been increasingly relying on this philosophy as a strategy for growth. As a consequence of this, the share of the private sector in total investment has risen. Public sector reforms will continue to be undertaken as a complement to the private sector so that it can function more effectively and upto its potential.

6.1.2 Stable political climate, continuity of policy and conducive social environment being essential ingredients for development, it will be the endeavour of the government to enlist social and political support for replicating concerns in the policies being formulated. There will be a continuous dialogue between the government and the business community as well as those associated with the process of development to identify the impediments that hampered the way of proper and fuller participation of the private sector. Issues such as those relating to simplification of procedures for credit, import and export, labour, infrastructure, energy etc. will be reviewed regularly and where necessary, policy re-adjustments will be made or appropriate decisions taken. While it will be the responsibility of the government to undertake supportive measures and develop infrastructure facilities such as that relating to communication, energy etc. which influence business decisions, the private sector will be encouraged to venture into such fields which hitherto have been the realm of the public sector.

6.2 Past Performance

6.2.1 Bangladesh inherited a mixed economic system at the time of liberation. But the economy was in shambles as a result of displacement of people, destruction of physical infrastructures and disruption and abandonment of industries. As a natural consequence as well as on account of the government policy, the public sector acquired a commanding role. The Government of Bangladesh nationalised various industries, business enterprises, banks and financial institutions exceeding Tk. 15 million in assets in order to reactivate the economy. The nationalisation policy covered a total of 725 industrial units under the management of 10 newly created public sector corporations. But owing to the growing pressure from such nationalised units on the financial and management resources of the public sector, 155 small enterprises earlier taken over by the government were gradually disinvested with the objective of fostering industrial growth and lessening the government's burden. The policy of disinvestment initiated the process of gradual expansion of the private sector. As cost continued to escalate, the ceiling on the private investment was raised gradually from Tk. 2.50 million under the first industrial policy of 1973 to Tk. 30 million in 1974. It was further raised to Tk. 100 million in 1975 and totally withdrawn in 1978. The government has been implementing structural adjustment and liberalisation policies since the 1980s, which enhanced the role of the private sector and created an environment conducive to its accelerated growth.

6.2.2 The growing emphasis on the private sector is reflected in the fact that the share of the private sector investment increased from 11 per cent in the First Plan to 44 per cent in the Fourth Plan (Table 6.1). The performance of the private sector was better than what was planned for in the Fourth Plan. In fact, the share of the private sector in the total realised investment was 54 per cent of the total investment in FY95.

Table 6.1 Projected and Realised Private Investment During Past Plans

( in million Taka)

 

Projected Investment (at base year

Percentage
of total Plan Outlay

Realised Investment

Realised
Annual Average

Investment

Plan

prices)

 

at base year prices

at 1996/97 prices

(at 1996/97 prices)

1

2

3

4

5

6

First Plan (1973-78)

5,030

11

4,390

56,114

11,223

Two Year Plan (1978-80)

6,000

16

9,570

38,697

19,348

Second Plan (1980-85)

61,000

35

49,690

160,209

32,042

Third Plan (1985-90)

136,000

35

98,820

191,997

38,399

Fourth Plan (1990-95)

273,000

44

324,397

410,226

82,045

Plan Holiday Period (1995-97)

291,600

57

291,600

295,600

147,800

Note : Realised investment based on investment deflators of BBS.

6.2.3 The investment rate of the private sector in FY91 was 5.82 per cent of GDP which rose to 10.71 per cent in FY96. On the other hand, the investment rate of the public sector rose from 5.65 per cent of GDP in FY91 to 6.29 per cent only in FY96. During FY97, the investment rates of the private and public sectors were 10.86 per cent and 6.52 per cent respectively. The estimate of private saving rate in FY94 was 11.70 per cent which increased to 12.30 per cent in FY95. This rate declined in FY96 though it remained above 11 per cent. This was partly due to the large interest rate spread between advances and deposits with inflationary expectation continuing low. While total private investment has grown in recent years, its performance in different sectors has been rather mixed (Table 6.2.).

Table 6.2 Realised Private Investment During Fourth Plan Period  (at 1989/90 prices)

(in million Taka)

Sector/

Year

1989/90

(Benchmark)

1990/91

1991/92

1992/93

1993/94

1994/95

Average Annual Compound Growth Rate

Agriculture

6,500

3,902

6,630

7,131

81,31

8,887

6.46

Manufacturing

4,500

14,035

17,188

19,792

19,915

28,092

44.24

Housing and Construction

7,000

6,299

7,252

9,196

10,873

15,897

17.83

Transport and Communication

5,300

5,131

5,203

5,653

5,846

10,451

14.55

Trade and Other Services

7,000

15,818

17,049

22,035

23,452

30,539

34.26

Total

30,300

45,185

53,322

63,807

68,217

93,866

25.38

Source: BBS

6.2.4 The private investment in agriculture has grown at a rate of 6.46 per cent per annum during the Fourth Plan. Agriculture has always been dominated by the private sector as farms are operated and managed by private individuals. The public sector in agriculture is responsible for the creation of infrastructure for gravity flow irrigation, barrages, etc. On the other hand, the private sector has been involved in land development and small irrigation facilities. The distribution and sale of agricultural inputs like fertiliser, irrigation equipment, seeds, pesticides, etc., is also being handled by the private sector. The growth of livestock, fisheries and forestry has been faster than the growth of the crop sub-sector. These sub-sectors have grown at rates between 4 to 9 per cent annually during the 1990s while the highest growth rate achieved in recent years in crop sub-sector has been around 2 per cent in FY96. The growth of these sub-sectors has been largely possible due to the dynamism of the small entrepreneurs of the private sector involved in non-crop activities.

6.2.5 The private sector activities in manufacturing have been expanding rapidly and there has been perceptible diversification involving the emergence of ready-made garments industries. During the Fourth Plan, private investment in the manufacturing sector grew at an annual average rate of 44.24 per cent leading to an increase in the share of the sector. The emergence of RMG is a very significant phenomenon in the development of the manufacturing sector and has been made possible primarily by the dynamism of private entrepreneurs. As a result of the growing private sector involvement, the growth of the manufacturing sector has picked up in recent years. The annual growth of manufacturing during FY90 and FY97 has been in the range of 7 to 9 per cent.

6.2.6 The growth of services sector has been high in recent years. This sector now contributes more than half of Bangladesh's GDP. Because of the ongoing liberalisation policy, including the privatisation policy of the government, activities covering transport, trade, housing, health, education, banking and insurance and professional services are increasingly being managed by the private entrepreneurs. Private investment in trade and other services grew at an annual average rate of 34.26 per cent, while total investment in the private sector grew at a rate of around 25 per cent during this period. The public sector involvement continues to be there but at the same time the role of the private sector has accelerated and privatisation of the service sector is encouraging.

6.3 Review of Reforms

6.3.1 In pursuance of the government objective of developing a market economy with the private sector as the key player, several structural adjustment policies have been undertaken. These include reforms in fiscal and monetary management, banking, trade policy, privatisation, etc.

6.3.2 Macro policy reforms: Experiences of developing countries show that the performance of the private sector is significantly dependent on macro economic stability. Prudent fiscal and monetary management is an essential instrument for bringing about this change. Since the late 1980s, efforts have been made to improve the content and effectiveness of both these macro policies.

6.3.3 The main features of the fiscal policy during the last few years have been the, (a) containment of current expenditure and (b) earning of more revenues through rational tax measures. Major tax reforms included expansion of coverage of income tax and VAT instead of customs and sales tax. The tax/GDP ratio increased from 7.90 per cent in FY91 to 9.40 per cent in FY96 while current expenditure to GDP ratio remained almost constant (Table 6.3). The overall budget deficit to GDP ratio has declined during this period minimising the impact of fiscal operations on inflation. In fact, the inflation rate came down from 9.33 per cent in FY90 and 8.85 per cent in FY91 to 5.22 per cent and 4.07 per cent in FY95 and FY96, respectively.