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Quarterly Economic Update, Bangladesh, June 2005
Dhaka, Bangladesh, 31 July 2005
Summary
For FY2005, the overall economic performance remains positive with a steady expansion in the industry and services sectors despite serious flooding. Even with increasing pressures, the fiscal and current account deficits remain moderate. However, an increase in oil prices threatens the balance of payments. The monetary policy stance remains expansionary and the exchange rate came under pressure. Inflation edged up due to higher food prices and an increase in international prices.
Agriculture
The agriculture sector, particularly food crop production, suffered a setback in FY2005 due to serious flooding. However, output of other sub-sectors including animal farming (mainly due to higher poultry production), forestry and fishing (both inland and marine catches) recorded steady growth. Total food grain production during FY2005 is currently estimated at 26.3 million tons, 4% lower than the preceding year. Overall, agriculture growth during FY2005 is estimated at only 0.3%, down from 4.1% in FY2004.
Industry
Industrial production maintained its robust performance, primarily due to steady growth in export-oriented manufacturing supported by strong growth in the construction and utilities sub-sectors, which include power, gas, and water supply. Overall growth in the industrial sector during FY2005 is estimated at 8.6%, one percentage point higher than 7.6% in the previous year.
Services
The services sector registered steady improvement due to strong growth in foreign trade and manufacturing. Improvement in trade, an increase in public administration recruitment, expansion of the cell telephone network and the number of private TV channels, and an upsurge in the profitability of private sector banks were the main engines of growth. Overall, the growth of the services sector during FY2005 is estimated at 6.6% compared with 5.7% in the preceding year.
Economic Growth
GDP growth in FY2005 is estimated at 5.4%, lower than 6.3% in the preceding year, mainly due to the adverse impact of the July-September 2004 floods. Offsetting the weak performance in the agriculture sector was a steady expansion in the industry and services sectors. At 24.4% of GDP, investment was modestly up from 24.0% of GDP in the preceding year due to an increase in private investment, while public investment slightly declined. Over the medium-term, Bangladesh faces several challenges to sustaining high rates of economic growth. In the near term, this includes surging global oil prices, the consequences of the MFA phase-out on competitiveness in the garments industry, and weak governance.
Fiscal Management
Although revenue collection in FY2005 increased by 10.7% over FY2004, it fell short of the original growth target of 16.7%. In FY2005, total expenditure was 2.8% lower than the original target, with current expenditure above the budgeted level by 3.5% while the annual development program (ADP) was lower by 6.8%. At 4.5% of GDP in FY2005, the fiscal deficit exceeded the projected level of 4.3% of GDP. In spite of the sizable ADP underperformance, the higher fiscal deficit was caused by the slippage in revenue mobilization and higher than projected level of current expenditures. The FY2006 budget projects a fiscal deficit of 4.5% of GDP, the same as the previous year, with the expectation of boosting revenue and restraining current expenditure.
Monetary Developments
The monetary policy stance remained accommodative to higher credit demand. On a year-on- year basis, broad money increased by 16.3% in May 2005 compared with 13.3% in May 2004, largely due to a surge in private sector credit. Credit to the Government registered a negative growth during July-May of FY2005. However, there was a considerable increase in credit to the Government in June 2005. Consequently, credit to the Government during FY2005, recorded a high growth of 16.4%. In the face of the sharp monetary expansion accompanied by rising inflation, rapid import growth, and pressures on foreign exchange reserves, the central bank tightened monetary policy.
Balance of Payments
Exports grew by 15% during July-May of FY2005 over the corresponding period of the previous year. Even though growth of woven garments slowed, growth of knitwear registered robust growth of 34.6% - resulting in overall steady rise in merchandise exports. Year-on-year imports have grown at a high rate of 26.6% during the first ten months of FY2005. There have been large increases in import bills for oil, food grain, chemicals, industrial raw materials and capital goods. In view of the sharp increase in the trade deficit and in spite of a higher growth in worker remittances (a 14.8% year-on-year increase), the surplus of $394 million in current account of the balance of payments during July-April of FY2004 was transformed into a deficit of $402 million during July-April of FY2005. According to latest estimates, oil import bills in FY2005 increased by 54% over the previous fiscal year. The incremental cost (around $550 million) due to oil price increases reduced foreign exchange available for other essential imports and put pressure on reserves and the exchange rate.
Inflation
The rising trend in inflation continues with point-to-point inflation reaching 6.9% in May 2005, because of rising food prices. Direct inflationary effects of the oil price increase have been limited due to the incomplete pass-through in view of the administered retail price of petroleum products in the domestic market. However, increased prices of imported goods caused by the higher international oil prices combined with the rise in import prices due to the Taka depreciation has also fueled inflationary pressures in the economy.
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.
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