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News Release

Quarterly Economic Update, Bangladesh, March 2006

Dhaka, Bangladesh, 4 May 2006

Summary
Despite external pressures, economic outlook remains positive due to a steady expansion in industry and services, aided by a strong recovery in agriculture. MFA phase-out benefited major competitive countries including Bangladesh. Higher petroleum prices have contributed to rising fuel subsidies, which could have serious macroeconomic consequences in the period ahead. Shortage of electricity and unreliable supply are costly to the economy.

Agriculture
The agriculture sector has significantly recovered with a good summer crop and an encouraging expectation for the winter crop. This year’s aman production is estimated at 10.8 million tons, an increase of 10% over production a year ago. Despite some disruptions in the delivery of key agro-inputs, the boro crop is expected to be close to the forecast of 14 million tons, provided that weather conditions continue to remain favorable. In addition, early production estimates for maize, jute, potatoes, winter vegetables and both inland and marine fisheries are promising.

Industry
Driven by export-oriented manufacturing, the industrial sector continues to register robust performance. In the first seven months of FY2006, output of medium and large scale manufacturing expanded by a strong 13.2%, compared with the same period of the preceding year. The construction sector also expanded at a steady pace, as indicated by the high growth in the production of cement and import of construction materials. Electricity and gas production also experienced a substantial surge reflecting strong consumer and industrial demand growth.

Services
There has been a strong and sustained expansion in the services sector in line with rapid growth in agriculture and industry. There has been a substantial increase in cargo handled by the port and a sharp expansion of bank credit to the trade and transport sub-sectors. Rapid growth in the mobile phone market, and an expansion of health care service providers also contributed to robust service sector growth. Profit margins in the private sector banks remain quite healthy and this is also likely to have a positive effect on the growth in financial services.

Economic Growth
GDP growth is estimated at 6.5% in FY2006, higher than 5.6% in the preceding year, reflecting a steady increase in domestic and external demand. Bangladesh, however, needs to address three major behind-the-border barriers to trade and long-term growth potential including (i) weakness in economic governance, (ii) inadequate physical infrastructure and (iii) high cost of trade, which impinge on export competitiveness.

Fiscal Management
Despite some success in revenue administration reform, revenue collection continues to lag behind projection. Revenue collection under the NBR during July-March of FY2006 increased by 12.4% over the corresponding period of the preceding year. The promise of achieving major revenue gains through setting up the large tax payers units for income tax and VAT remains largely unfulfilled due to inadequate preparation and lack of operational clarity. Weak institutional capacity and poor quality at entry for projects are adversely affecting ADP implementation.

Monetary Developments
Despite a tight monetary policy stance, money and credit growth continues to be high. In the 12 months ending February 2006, aided by a 23.5% growth in reserve money, broad money increased by 18.1%. Higher money and credit growth supported private sector activity but exerted pressure on the price level and exchange rate. Bank-by-bank resolution strategies for the four NCBs have made some progress with steps taken to revive the divestiture of the Rupali Bank. Gross non-performing loan (NPL) ratios of NCBs declined from 24.5% in the quarter ending September 2005 to 21.4% in the quarter ending December 2005.

Balance of Payments
Exports during July-February of FY2006 recorded a 17.9% growth over the corresponding period of FY2005, led by strong growth in knitwear and woven garments. Growth in imports has decelerated during the year, mainly reflecting a fall in the imports of food and consumer items. Imports during July-February of FY2006, grew by 9.8%. Rising exports and slower-than-trend growth in imports caused the trade deficit to fall during the period. Although deficits on service and income accounts increased, migrant workers’ remittances increased by a robust 23.8% during the same period, turning the deficit in the current account balance into a surplus.

Inflation and Exchange Rate
Inflation, on a point-to-point basis, declined to 5.7% in February 2006 from 7.7% in July 2005. Although decelerating, the rate of inflation remains high by historical standards. The high inflation rate is caused by the growth in money supply and domestic credit, and the knock-on effects of higher international prices. The continuing upward trend in oil prices and depreciation of the Taka are likely to heighten price pressures.

Reforming the Power Sector
Although substantial reforms have been initiated in the power sector over the past 10 years, the sector has a long way to go to fulfill the power supply requirements of the country. The reform process needs to be accelerated to further expanding power generation capacity, eliminating operational inefficiencies, reducing the cost of supply through greater public and private sector participation, and adopting a pricing policy to recover operational costs.

ADB, based in Manila, 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 65 members – 47 from the region. In 2005, it approved loans and grants for projects totaling $6.95 billion, and technical assistance amounting to $198.8 million.

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