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p. 28 of 68 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 Asia The Pacific III. Competitiveness in Developing Asia Statistical Appendix

Asian Development Outlook 2003 : II. Economic Trends and Prospects in Developing Asia : South Asia

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Bangladesh

GDP growth in FY2002 moderated due to a contraction in agriculture and a slowdown in exports. The Government has taken steps to improve the macroeconomic environment by reducing the fiscal deficit and by moving toward a more market-oriented economy. Economic growth should pick up in the next 2 years, with a recovery in both domestic and external demand.

Macroeconomic Assessment

The Government recently revised its GDP growth estimate for FY2002 (ended 30 June 2002) to 4.4% from 4.8%. Lower growth was primarily attributed to a contraction in agriculture and a slowdown in export-oriented manufacturing activity.

Total production of foodgrain in FY2002, at 25.9 million tons, represented a 3.2% (0.9 million ton) decline over the previous year. Lower production stemmed mainly from adverse weather, which more than offset the increased use of high-yielding variety seeds, fertilizer application, and extended irrigation. Despite this setback, net availability of foodgrain from domestic sources at 23.3 million tons represented a surplus in excess of 1 million tons over domestic consumption.

Industry sector growth moderated to 6.6% in FY2002 from 7.4% in the previous year, due mainly to weaker manufacturing output. Decreasing to 4.5% growth, from 6.6% in FY2001, the setback to medium- and large-scale manufacturing resulted largely from a significant slowdown in the export-oriented garment, processed food, and chemical industries. Notwithstanding subdued manufacturing growth, industrial activities that are less dependent on global demand—such as small-scale industry, electricity generation, and gas production have experienced relatively robust growth. Growth in construction activity, however, slowed marginally to 8.4% from 8.7% in FY2001 due to an ongoing oversupply of commercial buildings and apartments. The subdued level of export-oriented manufacturing and a relatively flat level of foodgrain production depressed wholesale and retail trade, and transport, storage, and communications activities. As a result, growth in overall services sector activity moderated to 5.3% from 5.5% in FY2001.

Based on the findings of the 1999/2000 Labor Force Survey, which was published in August 2002, the annual average growth rate of the labor force increased by 1.9% in the 1990s, and by 2000 had reached 60.3 million people, compared with 51.1 million people in 1991. Relatively higher economic growth during this period did not, however, result in a significant creation of new jobs, with the annual employment growth rate increasing by only 1.6%. According to the Survey, the unemployment rate in FY2000 was only 3.7%. If, however, day laborers working less than 15 hours a week are included, in addition to the number of unemployed, the unemployment rate would increase to 11%. Further, inefficiency of the Bangladeshi labor market is revealed by the underemployment rate, which is as high as 35% of the employed population. Recently, the number of people who leave to work abroad has declined, with a particularly steep drop evident from FY2001 to FY2002, reflecting the global economic fallout following the September 11 attacks.

Despite the high incidence of unemployment, for those employed, increases in real wages have been maintained in recent years. This partly reflects relatively low inflation and a high demand for certain skills in the formal labor market.

Revenue collection in FY2002 rose to 10.2% of GDP from 9.5% a year earlier. Though falling short of the target by 2.0%, the revenue performance was impressive given the slowdown in imports, moderate growth in industrial production, and the political changes arising from the general election that took place during the year. Progress in revenue mobilization was possible because of a renewed emphasis on administrative initiatives and close monitoring and supervision. Despite revenues falling below target, the fiscal deficit declined sharply to 4.4% of GDP from 6.1% in the previous year. This was due to containing current expenditures and a substantial pruning of the Annual Development Program. Actions taken by the Government to reduce pressure on the budget, such as cancellation of a Non-Aligned Movement summit, freezing government recruitment, and upward adjustment of energy prices mainly accounted for the lower growth in current expenditure. Cutting back low-priority and unproductive projects and keeping in abeyance contracts under suppliers' credit substantially reduced expenditure under the Annual Development Program. These developments generally led to an improvement in the quality of budgetary allocation.

Despite the sharp decline in the fiscal deficit, given the increasing domestic debt-to-GDP ratio, there is some concern over its sustainability. In terms of financing the fiscal deficit, external resources accounted for 2.3% of GDP and domestic resources 2.1%. A notable feature of the fiscal deficit financing sources was the reduced reliance on more expensive domestic borrowing, which dropped from 57.6% of total financing in FY2001 (3.5% of GDP) to 47.2% during FY2002. As a result, the ratio of interest payments on domestic debt to revenue, an indicator of debt-servicing capacity, declined from 13.6% in FY2001 to 12.9% in FY2002.

During FY2002, the increase in domestic credit slowed to 12.9% from 17.7% in the previous year. This was mainly due to a sharp deceleration in credit growth to the public sector, and reflected increased efforts to contain the central government fiscal deficit and the imposition of financial discipline on SOEs. During the year, private sector credit growth also experienced a moderate slowdown, reflecting both a lack of access to and appetite for credit as a result of sector-specific profitability issues, a more cautious attitude toward lending, an uncertain economic environment, a poor law-and-order situation, and relatively high interest rates due to a high level of NPLs. At the same time, net foreign assets of the banking system rose sharply as a result of increased migrant worker remittances (Figure 2.14). However, these higher asset levels could not offset the slowdown in domestic credit expansion, and the rate of increase in broad money (M2) moderated to 13.1% in FY2002 from 16.6% in FY2001. Slower money supply growth was, however, accompanied by a significantly higher (24.3%) increase in reserve money due mainly to a sharp rise in net foreign assets of Bangladesh Bank. Excess reserves of the banking sector accounted for the resulting decrease in the money multiplier.

The annual average rate of inflation edged up to 2.4% in FY2002 from 1.6% a year earlier. On a point-to-point basis, inflation picked up at a slightly higher pace from 1.7% in June 2001 to 2.6% in June 2002. Low inflation stemmed mainly from depressed food prices (which have a weight of over 60% in the overall index), which increased by 1.4% in June 2002, up from 0.9% in June 2001. Nonfood inflation, however, climbed more sharply to 6.1% from 3.1%, due mainly to a rise in administered prices after December 2001. Despite only a modest 1.6% devaluation of the taka in January 2002, the competitiveness of exports was not adversely affected during the year. After appreciating slightly in January and February 2002, because of inflation differentials with its trading partners, the real effective exchange rate of the taka subsequently eased back due to a weaker dollar. By November 2002, the real effective exchange rate had depreciated by 1.7% over the level of November 2001.

Balance-of-payments data for FY2002 indicate that merchandise exports and imports at $5,929 million and $7,697 million, respectively, declined by 7.6% and 8.7% from the prior year level. These trends reflected the global slowdown, the economic fallout from September 11, and the import-dependent nature of exports. Given that the decline in imports was larger than that of exports, and that imports constituted a higher initial base, the decline in imports more than offset the decline in exports and led to a narrowing of the trade deficit to $1,768 million in FY2002 from $2,011 million in FY2001.

The decline in export earnings was broad based, affecting all major export categories, excepting jute goods and agricultural products. Particularly large declines (in terms of value) were recorded for frozen foods and readymade garments. While the export of frozen foods was affected by a combination of higher freight and insurance costs (after the September 11 attacks), the decline in readymade garment exports has been attributed to subdued global demand and the earlier granting of duty- and quota-free access to the US for garment exports from Caribbean and Sub-Saharan countries, which undermined garment exports from Bangladesh during the year.

The decline in imports was also broad based. Significant falls were evident in foodgrain (rice in particular), sugar, cement, petroleum and petroleum products, and raw materials and other inputs for the garment industry. Imports of inputs to the garment industry were affected by the more subdued export sales for this industry.

During FY2002, the lower trade deficit was accompanied by a 32.9% increase in overseas worker remittances due, in large measure, to government efforts to encourage the flow of remittances through official channels (Figure 2.14). As a result of these developments, the current account balance (excluding official grants) moved to a surplus of $171 million (0.4% of GDP) from a deficit of $1,090 million (2.3% of GDP) in FY2001. The substantially improved current account more than offset a somewhat weaker capital and financial account arising from lower inflows of official grants, FDI, and supplier credits. This led to an overall balance-of-payments surplus of $365 million in FY2002, compared with a deficit of $226 million in the previous year. Following improvement in the overall balance, foreign exchange reserves increased to $1,583 million at the end of June 2002 from $1,307 million a year earlier.

Policy Developments

As FY2002 progressed, regaining and maintaining control over public finances, and moving toward a more market-oriented economy, became central to efforts by the Government to maintain macroeconomic stability. In addition to the measures taken to tighten budgetary discipline, the Government has set up a Public Expenditure Review Commission and a Revenue Reform Commission, and has planned a midterm review of the budget to ensure that it remains within sustainable limits and is no longer a source of instability to the economy. Both commissions have now submitted their interim reports, and the Government is expected to take account of their recommendations in revising the FY2003 budget and in framing the budget for the following year. The FY2003 budget also introduced major reforms in the import duty structure, restarting the tariff liberalization process that had been stalled since the mid-1990s.

During FY2002, greater efforts were made to use market-based instruments to manage liquidity and bring about a more realistic structure of interest rates. Toward this end, in February 2002 the Government made it mandatory for commercial banks to meet their cash reserve ratio only through local currency and not through their foreign currency balances, as the latter weakens monetary control and constitutes an expansionary device in the event of devaluation. Bangladesh Bank also increased the size of its treasury bill auctions during the year in a bid to contain the expansion in base money. This had the effect of progressively increasing the treasury bill rate to a more realistic level. Although the introduction of repurchase (repo) operations during the year was also meant to enhance the ability of the Government to control liquidity, due to the prevalence of excess liquidity in the market for much of the year, this facility was only used sparingly. The Government also appears to have agreed in principle to move toward a flexible exchange rate. However, timing remains an issue. There is agreement that a more flexible exchange rate system would require improving the institutional capacity of Bangladesh Bank and developing a more market-based monetary framework to control domestic inflation. With this in mind, the cabinet recently agreed to a number of major amendments to existing legislation to give greater autonomy to Bangladesh Bank to conduct monetary policy. Much effort has also been expended to prepare, on the basis of broad public consensus, the Government's National Strategy for Economic Growth, Poverty Reduction and Social Development, which would provide the basis for future development planning.

Notwithstanding these reform measures and the closure of a major loss-incurring state-owned jute mill and a number of loss-making branches of nationalized commercial banks, more remains to be done. Inadequate progress in governance as well as in institutional and structural policy reforms continues to adversely affect the investment environment.

Outlook for 2003-2004

GDP growth for FY2003 is likely to accelerate to 5.2% on the back of steady growth in agriculture and stronger demand in the US and EU for the country's major exports. While there are some indications of a shortfall in the aman rice crop due to adverse weather, the resulting high prices have led to renewed interest in the cultivation of the forthcoming boro crop. Overall, no major shortfall is expected in foodgrain production over the year.

Data for the first 3 months of FY2003 indicate a broad-based rebound in manufacturing. GDP growth is likely to strengthen further to 5.8% in FY2004 due to a further recovery in the major OECD markets and a pickup in private sector economic activity as the Government makes progress on structural and economic reforms. Although growth of this magnitude will be insufficient to make a major dent in reducing poverty in Bangladesh (currently estimated at close to 50% of the population on the basis of a cost of basic needs approach), the measures taken in FY2002 should nevertheless provide the basis for sustaining economic growth and poverty reduction in the future.

The fiscal deficit for FY2003 is likely to meet the target of 3.9% of GDP due to strong government commitment to contain low-priority expenditures, and a renewed effort at mobilizing revenue. Data for the first 6 months of FY2003 indicate that revenue collection has exceeded its target by 1.8%. The fiscal deficit is, however, likely to widen to 5.2% of GDP in FY2004 as revenue growth remains stable and as the Government increases both current and Annual Development Program expenditures, given the greater availability of concessional aid.

The annual average rate of inflation is likely to edge up to 3.8% in FY2003 due to relatively higher food prices and an increase in nonfood prices on account of a rise in administered prices. In FY2004, inflation is expected to increase to 4.5%, reflecting more buoyant domestic demand and a depreciation in the external value of the taka to increase the competitiveness of the country's exports. This is likely to increase the price of imports.

Preliminary balance-of-payments data for the first 4 months of FY2003 indicate that merchandise exports increased by 9.2% compared with the same period of the previous year. This was mainly due to large increases in exports for jute and jute goods, frozen foods, and knitwear and hosiery products, partly reflecting a pickup in global demand. This was, however, partly offset by continuing declines for tea, leather goods, and readymade garments, despite an increase in the volume of garments. This is perhaps an indication of the extent of competition facing the country's garment industry. Imports continue to show no clear sign of recovery with year-on-year imports declining by 7.1% during the first 4 months of FY2003. Such a low level of imports is, however, most unlikely to be sustained as the year progresses. Although large increases were evident for rice imports (perhaps reflecting a somewhat subdued domestic aman crop), this was more than offset by large decreases in imports of crude oil, textiles and textile articles, and capital goods. While the decline in textiles does not augur well for garment exports, the decline in capital goods reflects continued uncertainty on the part of the private sector over domestic economic prospects.

The current account balance in FY2003 will once again revert to a deficit in the order of 1.3% of GDP, as import growth recovers and growth in remittances remains stable. Foreign exchange reserves could come under some pressure with the worsening current account balance. Notwithstanding a further recovery in the global economy in FY2004, and an increase in exports, the current account deficit is likely to widen to 2.5% of GDP as import growth picks up strongly. Given the greater availability of concessional aid with the implementation of the National Strategy for Economic Growth, such a deficit level, which is historically high for Bangladesh, should nevertheless be manageable.

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