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News Release

Quarterly Economic Update, Bangladesh, September 2004
Dhaka, Bangladesh, Thursday 28 October 2004

Summary

Devastating floods caused extensive damage to the economy. For FY2005, GDP growth is estimated at 5%, 0.5 percentage point lower than the preceding year. Despite pressures, the fiscal and current account deficits are likely to be within manageable limits. Foreign exchange reserves at 3.5 months of imports equivalent at the end of September 2004 provide ample cushioning against external shocks. Price pressures are expected to be heightened due to the aftermath of floods, onset of Ramadan and surge in international prices.

2004 Floods Overview

During July - August 2004, devastating floods seriously affected Bangladesh. The north and the west-central districts suffered severe floods, which continued to spread, eventually affecting Dhaka and other central districts. The floods, affecting about 38% of Bangladesh, caused extensive damage to standing crops, physical and social infrastructure, environment and livelihood of 36 million people. Further, in September 2004, a localized low-pressure depression swept over Bangladesh resulting in excessive rainfall - three times the normal levels. This intense rainfall caused another round of flooding in Dhaka and central and southwest districts.

2004 Flood Damages

According to a preliminary flood damage assessment jointly conducted by World Bank and ADB in September 2004, the July-August flood damages are estimated at about $2.2 billion or 3.9% of GDP. The flooding caused widespread damages to household dwellings, roads, bridges, embankments and irrigation systems, water supply and sanitation, education, power as well as considerable losses to agriculture and small and medium enterprises.

Outlook for Economic Growth

It is estimated that the agriculture growth during FY2005 will slip to 2%, from the steady 2.7% during the preceding year due to flood-induced setback in standing summer crops (aus, aman seed beds and early transplanted aman), vegetables, fisheries and animal farming. In FY2005, industrial growth is likely to be 6.3%, lower than the 7.7% in the preceding year. The slippage in growth will be mainly because of flood related dislocation in the production of the small and medium scale enterprises. The orders in the garments industry remain strong although uncertainty remains on the prospect of this industry due to the planned termination of the MFA quotas at end-2004. The services sector in FY2005, mainly reflecting deceleration in growth in industry and agriculture sectors, is likely to show slightly lower growth at 5.5%, from 5.7% in the previous year.

For FY2005, the pre-flood projection of GDP growth was 6%. With floods, GDP growth is currently estimated at 5% compared with 5.5% in the preceding year. However, there are several global risks including the surging oil prices, uncertain sustainability of growth momentum in the major industrial countries, rising interest rates and the persistent slide in dollar. On the domestic front, the country needs to upgrade its infrastructure and address governance issues including law-and-order and corruption.

Fiscal Developments

The impact of the floods and political disruption exerted pressures on revenue collection. Revenue collection during the July-September period of FY2005 was 12.5% higher than the corresponding period of FY2004. However, it was 8.3% short of the proportional target. An accelerated revenue mobilization drive will be necessary to generate higher revenues to support flood rehabilitation. Unless there is a major slippage in revenue, the fiscal deficit is expected to remain within 4.3% of GDP due to the restraints imposed on current spending and prioritization of development spending.

Monetary Developments

Monetary growth appears to be showing increasing trends in FY2005, with year-on-year broad money growth increasing by 14.8% in August 2004 (14.4% in August 2003), and reserve money increasing by 11.6% (6.3% in August 2003). Further monetary expansion is likely due to step up in credit expansion to support recovery from the flood damages.

Inflation

The annual average inflation increased to 5.9% in August 2004 from 4.6% in August 2003. The rise in food prices remains the driving force in the rise in inflation. Price pressures are likely to heighten in the coming months due to the effects of the devastating floods and onset of Ramadan. Further, the surge in oil prices and international food prices has increased the risk of import-led inflation in the country.

Balance of Payments

The rising trend in exports continued in FY2005 with year-on-year export rising by 26.4% in July-August 2004, mainly due to robust performance of knitwear and garments. The effects of forthcoming MFA phase-out and the damages caused by the flooding to knitwear and other export oriented manufacturing are yet to be reflected in export growth. Reflecting a larger trade deficit, the current account in FY2005 is expected to post a deficit of 1.5% of GDP compared with a surplus of 0.3% in FY2004. The foreign exchange reserves further increased to $3.1 billion or 3.5 months of imports equivalent on 30 September 2004 providing ample cushioning against external shocks.

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.