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p. 26 of 81 BACK | NEXT I. Developing Asia and the World II. Economic Trends and Prospects in Developing Asia East Asia Southeast Asia South Asia Afghanistan Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka Central Asian Republics The Pacific III. Preferential Trade Agreements in Asia and the Pacific

Asian Development Outlook 2002 : II. Economic Trends and Prospects in Developing Asia : South Asia

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Bangladesh

Based on a record crop harvest and an industrial recovery, the economy maintained steady growth, despite external economic and internal political pressures. A deteriorating external environment is likely to pull down GDP growth a little in 2002. The economy should then pick up in 2003, reflecting a rise in both domestic and external demand. The Government needs to address structural issues in the external sector, in public finance, and in banking, if the economy is to achieve sustained growth over the medium term.

Macroeconomic Assessment

Despite lingering external pressures and political disruptions, the economy achieved steady growth during 2001 with GDP expanding by 5.2%, compared with 5.9% in 2000. This performance was underpinned by an exceptional crop harvest and a rebounding industry sector.

Favorable weather, the increased use of high-yielding varieties of crops, extended irrigation, and the ready availability of agricultural inputs such as seeds, fertilizer, and fuel at lower prices contributed to a record 26.8 million tons of food grain production. This represents a 7.6% increase over the previous year and was over 2 million tons more than domestic requirements (calculated at 455 grams per person per day). Despite the record, the overall growth rate of the agriculture sector declined to 3.1% from 7.4% in 2000, due to a high base for comparison following several years of successive bumper crop harvests.

Industry sector growth improved to 7.2% in 2001 from 6.2% in 2000, due mainly to stronger manufacturing. Increasing to 6.3% from 4.8% in 2000, manufacturing expansion was underpinned by a rise in domestic demand and a rapid strengthening in the export-oriented garment industry. The output of domestic market-oriented industries, including food processing, chemicals, cement, and small-scale industries, also rose considerably. Greater availability of bank credit to the private sector and higher imports of raw materials and machinery also supported manufacturing growth. Value added in 2001 in electricity, gas, and water supply together grew by a robust 7.4% compared with 6.8% in the preceding year, partly reflecting greater manufacturing activity. Growth in construction, however, rose marginally to 8.7% from 8.5% in 2000 because of an oversupply of commercial buildings and apartments. Services sector expansion was sustained at about ver, remained depressed as a result of losses incurred by SOEs. Despite the overall improvement in revenue performance, the budget deficit declined only marginally to 6.1% of GDP from 6.2% in 2000 due to expenditure overruns. In the wake of declining availability of external resources, domestic financing of the budget deficit stayed at 3.6% of GDP. This is a cause for concern, as domestic borrowing is costlier than foreign financing. As a result of this high level of domestic borrowing, the Government’s domestic interest payment obligations as a ratio of revenues—reflecting debt service capacity—rose to 13.6% in 2001.

Although money supply (M2) remained expansionary to accommodate fiscal spending, growth eased to 16.6% in 2001 from 18.6% in 2000. This was due to a decline in the net foreign assets of the banking system and a moderation in credit expansion to the central Government. Nevertheless, the growth rate of government borrowing from the banking system remained at a high level of 19.7% in 2001, with the bulk of the borrowing coming from the central bank. Credit growth to the private sector also climbed, from 10.7% in 2000 to 16.9% in 2001. This stemmed from the pickup in private sector economic activity, as well as from measures taken in 2000 to reduce the bank rate and reserve requirements, and to abolish the interest rate bands applicable to agriculture and SMEs.

Consumer price inflation dropped from 3.4% in 2000 to 1.6% in 2001, due mainly to increased production of food grain. Food inflation declined from 4.1% to 0.9% over this period, while nonfood inflation remained unchanged at around 2.7%. The value of the taka was adjusted twice against the dollar, in August 2000 and May 2001, resulting in a cumulative devaluation of 10.5%. This, together with lower domestic inflation, led to a depreciation of the real effective exchange rate to a level similar to that prevailing at the beginning of 1998.

Over the course of 2001, the Dhaka Stock Exchange’s all-share price index increased by 27.6%. The capital market is still, however, at a nascent stage, with market capitalization amounting to only $1.27 billion at the end of 2001 (and $1.05 billion at the end of 2000). Despite some progress in reducing nonperforming loans, the finance sector remained under stress, with the proportion of such loans in the banking system amounting to around 34% at the end of 2001.

The export growth rate accelerated from 8.2% in 2000 to 12.4% in 2001, though it decelerated sharply as 2001 progressed because of the global economic slowdown. This affected apparel exports particularly, which, together with knitwear, have accounted for about three quarters of total exports in recent years. Import growth picked up from 4.8% in 2000 to 11.4% in 2001, due mainly to increased imports of intermediate and capital goods from the import-dependent domestic and export-oriented manufacturing sectors. A higher trade deficit was accompanied by a decline in overseas workers’ remittances of 3.4%. These developments led to a widening of the current account deficit (excluding official grants) from 1% of GDP in 2000 to 2.1% in the following year.

Despite a mild improvement in the capital account, the overall balance deteriorated, resulting in an erosion of foreign exchange reserves from $1.6 billion (2.3 months’ equivalent of imports) at the end of 2000, to only $1.3 billion (1.7 months’ equivalent of imports) at the end of 2001 (Figure 2.14). The country’s outstanding external debt was around 34% of GDP at the end of 2001, while the debt service ratio crept up from 7.2% in 2000 to 7.5% in 2001.

Policy Developments

The 2002 budget projects a revenue target of 9.8% of GDP, or 0.3 percentage points higher than the figure achieved in 2001. In the absence of significant new revenue-raising measures, the Government aims to achieve the higher target by improving the efficiency of tax administration, modernizing the tax collection process, ensuring closer monitoring and supervision, and expanding coverage. After exceeding the revenue collection target in 2001 by 2%, the revenue intake during the first half of 2002 was 2.4 percentage points lower than the target set for the period. This was due mainly to a significant reduction in import-based taxes and to relatively subdued domestic economic activity. Despite a number of initiatives to reduce costs, such as upward adjustments in administered prices, cancellation of a summit of the Non-Aligned Movement, limiting contracts under suppliers’ credit, and freezing government recruitment, the Government will remain under pressure to contain the fiscal deficit. It continues to subsidize loss-incurring SOEs and its revenues are below target. Given these developments, the Government’s original budget deficit target of 5.4% of GDP for 2002 appears difficult to attain. Moreover, the Government is also unlikely to be able to reduce domestic financing of the budget from 3.5% to 2.6% of GDP, between 2001 and 2002, unless it takes steps to curtail unproductive and low-priority public expenditures, improve utilization of foreign aid, and privatize SOEs.

As the prospect of a lower than expected revenue outcome in 2002 unfolds, the expansionary trend in monetary policy is likely to continue to accommodate increases in government borrowing from the banking system. This has resulted in a crowding out of private investment. The growth of credit from the banking system to the Government has accelerated considerably, from 21.4% in July 2001 to 27.1% in October. The growth rate of broad money (M2) on a year-on-year basis, however, declined marginally from 15.1% in July 2001 to 14.1% in October. To encourage lending to the private sector, the central bank reduced the bank rate from 7.0% to 6.0%, also in October. Monetary policy is likely to remain expansionary for the duration of the forecast period.

The policy stance on exchange rate management remains unchanged with periodic adjustments in the exchange rate of the taka against the dollar as the main vehicle of management. In January 2002, the taka was devalued by a further 1.6% against the dollar as foreign exchange reserves came under heavy pressure. External reserves declined to only $1.1 billion (1.5 months of imports) during early January 2002 after two Asian Currency Union payments were made. The Government recently imposed regulatory duties on nonessential imports and enhanced margin requirements for letters of credit to ease pressure on foreign exchange reserves. These measures are not, however, consistent with the spirit of past trade policy reforms and may introduce new distortions. As the probable range within which the taka needs to be adjusted to maintain competitiveness is likely to be quite small, the Government needs to consider other trade policy reform measures that remove distortions on the tariff front.

Outlook for 2002-2003

The global economic slowdown and developments following the events of September 11th in the US have considerably undermined the country’s growth prospects for 2002. The resulting setback in export-oriented manufacturing and loss of investor confidence are also adversely affecting key production and services sectors such as trade and transport, banking, insurance, ports, and shipping. Moreover, the sharp deceleration in export growth over recent months is also leading to considerably slower import growth, with negative consequences for the Government’s revenue intake. The loss of employment in the sectors immediately affected by the global slowdown, including garments in particular, is likely to be substantial with adverse consequences for poverty reduction. Between July and December 2001, about 1,200 garment factories closed and an estimated 350,000 workers in the garment industry lost their jobs. Higher unemployment will also make it harder for the Government to achieve its goal of reducing income poverty by 25% in 2005, from the levels that prevailed in 2000.

The GDP growth rate for 2002 is expected to decline to around 4.5%, due to a more subdued performance of export-oriented manufacturing and services, and lower agricultural growth. Based on the index of industrial production, manufacturing output declined by 0.02% during the first 3 months of 2002 (July–September 2001) compared with the corresponding period of 2001. There appears to be a discernible downward trend with manufacturing output declining by 2.3% in September 2001 compared with a year earlier. GDP growth is likely to pick up in 2003 to 5.7%, due to a measured recovery in external demand, particularly in the US and EU, and to progress with the country’s structural and economic reforms.

During the first 5 months of 2002 (July–November 2001), year-on-year export earnings fell by 10.9%, with all major export categories registering declines. The granting of duty- and quota-free access to the US market to garment exports from 72 Caribbean and Sub-Saharan African countries has disadvantaged the country’s garment exporters. Imports, in terms of letters of credit opened, declined by 7% during the first 5 months of 2002 over the corresponding period of the previous year, as exporters’ demand for industrial raw materials dropped. The current account deficit in 2002 is projected to widen to 2.5% of GDP on the assumption of an 8% decline in exports, a 5% decline in imports, and a gradual tapering off in remittances. Foreign exchange reserves are likely to be under mounting pressure from the expanding current account deficit. In 2003, the deficit is likely to decrease to around 2.1% of GDP, aided by stronger export performance and an increase in workers’ remittances as the world economy recovers.

The budget deficit is expected to remain high in 2002 at 6% of GDP, mainly on account of a shortfall in revenue collections. The annual average rate of inflation remained broadly stable between end-June 2001 and end-October 2001. On a point-to-point basis, however, consumer prices rose marginally over this period due to a pickup in prices of nonfood items. The inflation rate is expected to increase to 2.4% in 2002 due to a further rise in administered prices and slower growth in crop production. This will, to some extent, be offset by relatively subdued domestic demand. In 2003, consumer prices are likely to edge up to around 2.6% as the Government’s expansionary fiscal and monetary policies contribute toward demand-pull inflation.

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