Country Report Bangladesh July 2000 Updater

Economic policy outlook: Policy trends

Both the major parties -- the AL and the BNP -- are officially committed to free-market policies. Although a segment of the AL leadership is still wedded to the socialistic principles that the party espoused in the early 1970s, and pro-state-control forces, such as trade unions and left-wing politicians, are more at ease with the AL, it will continue in its attempts to liberalise the economy. The BNP is more demonstratively business-friendly and market-oriented. Bangladesh currently has a highly liberalised trade regime, which was introduced by the BNP while it was in power during 1991-96. Both the parties welcome foreign investment, but it is likely that the pace of reforms would be increased if the BNP were to return to power.

The fiscal situation has deteriorated in recent years. The government continues to subsidise or provide public guarantees to loss-making state- owned enterprises (SOEs) and nationalised commercial banks (NCBs) with high levels of non-performing loans. In addition, the government's tax collection has been below target, mainly because of weak growth of non- food imports, resulting from continued stagnation in the manufacturing sector and problems with the recently introduced preshipment (PSI) measures. It is also expected that budget targets for current expenditure will overshoot in the run-up to the election owing to higher than expected interest payments on domestic debt and expenditure such as the implementation of the new national wage commission. The situation is likely to deteriorate further if the government introduces the new wage scale for industrial enterprises. The government's development spending is funded largely by borrowing and by multilateral donors. Judging the effectiveness of government policy is made more difficult by the tardiness and unreliability of official data.

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