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News Release

Quarterly Economic Update, June 2004
Dhaka, Bangladesh, Wednesday 28 July 2004

Overview
For FY2004 (ending 30 June), GDP growth is estimated at 5.5%, driven by steady growth in agriculture, and export-oriented industrial production. Despite a steady increase in imports, the current account of balance of payments remains favorable due to rebounding exports and firmer growth in workers' remittances. Even with a shortfall in revenue collection, fiscal deficit has been contained mainly due to underperformance in development spending. The rising trend in prices has been contained with inflation declining to 5.6% in May 2004.

Agriculture
The agriculture sector during FY2004 showed steady performance due to strong crop harvests - benefiting from favorable weather conditions and continued expansion of HYV acreage. The output of animal farming, fishing and forest and related services also contributed to expansion of agricultural production. The agriculture growth rate is estimated at 2.7%, slightly lower than 3.1% in the preceding year.

Industry
Industrial growth sharply rebounded mainly due to a surge in export-led manufacturing production and domestic construction activity. The growth in industry in FY2004 is likely to be 7.7% compared with 7.3% during FY2003. Aided by growing external demand, growth of the manufacturing sector in FY2004 is estimated at 7.4% relative to 6.8% in the previous year. Energy and construction sub-sectors are also likely to register strong growth.

Services
During FY2004, the services sector is expected to show a strong growth of 5.7% as against 5.4% in the preceding year. Increasing agriculture production, industrial output and merchandize imports particularly contributed to higher services sector activity. Services sector activity showed steady progress in the areas of wholesale and retail trade, transport, storage, communication, real estate, and public administration and defence.

Economic Growth
The GDP growth rate for FY2004 is estimated at 5.5% as against 5.3% in FY2003. The growth performance is underpinned by steady growth in agriculture and industrial production, reflecting further expansion in both domestic and external demand. The growth in part was driven by a rebound in exports, and solid increases in government and private consumption. In FY2004, investments marginally increased to 23.6% of GDP and the national savings was 24.5% of GDP, the same as the previous year. Achieving the Millennium Development Goals (MDGs) of a 50% reduction in the poverty incidence by 2015 will require increasing the GDP growth to at least 7%. The growth of this magnitude needs investment increasing to at least 28% of GDP. Poor governance, including weak enforcement of law-and-order and corruption makes doing business difficult and inhibit investment. Transport constraints limit the opportunity for industries to compete in international markets. Given the huge potential for the country for export-led growth, significant improvements are required at the ports, road, rail and the waterways and in the provision of energy and information and communications and technology (ICT).

Fiscal Management
Although revenue collection in FY2004 grew by 13.7% over FY2003, it fell below the original target for the year by 2.1%. In FY2004, total expenditure was 5% below the budgeted target, with current expenditure falling below the budgeted amount by 3.3% while the annual development program (ADP) estimate was revised downwards by 6.4%. At 4.2% of GDP in FY2004, the fiscal deficit fell below the projected level of 4.8%. In spite of the large slippage in revenue mobilization, the low fiscal deficit was caused by the lower than projected levels of both current and ADP expenditures. The FY2005 budget projects fiscal deficit of 4.3% of GDP while seeking to accelerate mobilization of domestic resources and improving ADP utilization.

Monetary Developments
Monetary policy continues to be prudent. During FY2004 (up to May), credit to the Government registered a negative growth (-5.5%), as Government was able to repay earlier loans to the banking system due to lower levels of financing requirements. Private sector credit grew by 14.2% compared with the 13.8% growth observed during the same period of FY2003, indicating stable performance of mainly the domestic manufacturing and service sectors. The deceleration in the growth of net foreign assets of the banking system mainly contributed to the lower broad money growth of 8.8% as against 11% growth in the previous year.

Balance of Payments
Exports rebounded due to steady external demand for the major products. Merchandize exports during the first 11 months of FY2004 increased by a robust 15.2% compared with 8.6% during July-May of FY2003. Imports have also grown at a high rate of 16.4% during the first ten months of FY2004 compared with the 8.4% growth during the same period of the previous year. Despite a higher trade deficit and a more moderate growth in worker remittances, the current account continued to generate a surplus. The foreign exchange reserve, which was $2,705 million at the end of June 2004, declined somewhat to US$2,582 million as of 12 July 2004, due to the ACU payments of US$267 million in early July 2004.

Inflation and Exchange Rates
Higher import prices for both inputs and finished products, and an increase in nominal wages owing to strong economic activity partly contributed to relatively higher inflation during FY2004. The rising trend in inflation has, however, been contained. On a point-to-point basis, inflation declined from 6.7% in November 2003 to 5.6% in May 2004 with declining trends in food prices.

ADB is dedicated to reducing poverty in the Asia and Pacific region through pro-poor sustainable economic growth, social development, and good governance. Established in 1966, it is owned by 63 members - 45 from the region. In 2003, it approved loans and technical assistance amounting to US$6.1 billion and US$177 million, respectively.