Media Center

News Release

Quarterly Economic Update, Bangladesh, March 2005
Dhaka, Bangladesh, 11 May 2005

Summary

Despite severe floods and external shocks, economic performance remains solid in FY2005. Even with considerable pressures, the fiscal and current account deficits are expected to be moderate. The current revenue collection has fallen short of target and there is an urgent need to increase revenue-GDP ratio. Inflation edged up mainly due to higher domestic food prices and increase in fuel prices. Several policy initiatives and infrastructure developments are needed to face the challenges of the termination of multifiber arrangement (MFA).

Agriculture

The devastating flooding seriously affected the agriculture sector, particularly food crop production. The aman production is estimated at only 10 million tons or less, as against 11.5 million tons in the preceding year. Offsetting this decline is an anticipated bumper boro crop due to a significant expansion in crop areas. Despite flooding, the production of maize, potatoes and vegetables is expected to increase in the year. Agriculture growth during FY2005 is estimated at only 0.4%, down from 2.7% in FY2004.

Industry

Industrial production has maintained its upward trend, primarily due to steady growth in export-oriented manufacturing. Output of the large and medium scale manufacturers rose by 6.7% in the first half of FY2005, compared with the first half of the preceding year. In the period, output of small-scale manufacturers rose by 7.5%. The construction is continuing to exhibit solid performance. Largely driven by export-oriented manufacturing, the overall growth in industrial production during FY2005 is estimated at 7.8%, higher than 7.7% in the previous year

Services

The services sector is likely to show broad-based expansion in FY2005 with a growth of 6%, from 5.7% in the preceding year. Improvement in transport and trade services, an increase in the recruitment in public administration and surging profitability of private sector banks are expected to lift the service sector.

Economic Growth

GDP growth in FY2005 is estimated at 5.3%, slightly lower than 5.5% in the preceding year, mainly due to the adverse impact of the July-September, 2004 floods. There is a clear sign of steady increase in private investment as indicated by the surge in credit, particularly to industry and agriculture sectors, an increase in imports of capital goods, and most heartening, an upsurge in foreign direct investment (FDI) inflows. External demand remains buoyant, as the immediate fears of a post-MFA withdrawal scenario on textiles exports begin to recede. External risks do remain---a sharp depreciation of the US dollar, a sharp increase in US interest rates and higher petroleum prices could have adverse knock-on effects for Bangladesh. The economy continues to face a number of medium-term risks. These include the longer-term consequences of the MFA phase-out on competitiveness in the garments industry, a possible increase in hartals (general strikes) especially in the run-up to the January 2007 elections and weak governance.

Fiscal Management

Revenue collection under the National Board of Revenue (NBR) during the first three quarters of FY2005 increased by 11.7% over the corresponding period of FY2004, which is 63% of the target set for the fiscal year. With 37% of the targeted revenue required to be collected during the final quarter of the fiscal year, aggressive revenue mobilization efforts and improved monitoring and supervision measures will need to be mounted. Systemic reform of the tax system is urgently required to raise the revenue-GDP ratio from the current low level of 10.2% of GDP. This is needed for increasing public investment required for propelling the economy on a higher growth path for achieving the millennium development goals (MDGs).

Monetary Developments

Monetary policy stance has become expansionary and accommodative to private sector credit. Broad money (M2) increased by 8.0% in the first eight months of FY2005 compared with 6.6% during the corresponding period of the previous fiscal year. The higher growth in net foreign assets during the period was reinforced by the higher growth in net domestic asset of the banking system. Expansionary monetary policy, while stimulating private sector activity and supporting rapid growth of imports, fueled inflationary pressures in the economy, in addition to putting pressures on the exchange rate.

Balance of Payments

Exports during the first nine months of FY2005 registered an increase of 12.5% over the identical period of the previous fiscal year. Two major items, knitwear and woven garments, accounted for 78% of the export earnings for the period. The initial impact of MFA phase-out effective January 2005 has been quite modest. There are very few reports of factory closures or job losses, although it may be too early to judge the evolving outcome. Imports have been growing robustly, with year-on-year imports for the first seven months of FY2005 increasing by 21.3% mainly due to increases in imports of consumer goods, intermediate goods, capital machinery and petroleum products. Despite increase in workers’ remittances, widening trade deficit resulted in a deficit in the current account.

The Asian Development Bank 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, with 45 from the region.

Contacts