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News Release

Quarterly Economic Update, Bangladesh, September 2006

Dhaka, Bangladesh, 3 December 2006

Summary
Macroeconomic fundamentals remain strong with sustainable external and internal balances. The industry sector, lifted by strong external demand, continues to show robust performance. But Bangladesh faces several downside risks, including political uncertainty and infrastructure constraints.

Agriculture
Harvest of aus-the first rice crop of this year-is complete; production is estimated at 1.51 million tons, lower than 1.75 million tons in 2005. Scanty rainfall and short supply of fertilizer, insecticide, and higher inputs prices, affected the aman harvest in many parts of the country. But the aman harvest is still expected to be higher than last year as the farmers brought more land under cultivation.

Industry and Services
During the first quarter of FY2007, the manufacturing sector continued to maintain steady growth as indicated by robust growth in manufacturing exports led by garment sector, import of industrial raw materials, and private sector credit. During the first 2 months (July and August) of FY2007, output of medium-sized and large manufacturing rose by 14.8% compared with the same period of FY2006. The services sector also continued to expand in line with rapid growth in industry. But if the political uncertainty in the country continues, manufacturing growth will be adversely affected. Besides slowing production and the growth momentum, political disruption would also affect competitiveness and the investment climate.

Economic Growth
GDP growth is forecast at 6.0% in FY2007. The growth in agriculture is expected to moderate from the post-flood high growth in the preceding year. The conditions for expansion in industry (aided by new capacity in garments and textiles, chemicals, and engineering) and services are expected to be favorable, although emerging infrastructure constraints pose problems. The main challenges facing the thriving garments subsector are emerging social compliance issues including labor unrest and infrastructure constraints rather than the adverse effect of abolishing MFA quotas. Although Bangladesh significantly improved its business- friendly environment for sustaining higher GDP growth, infrastructure needs to catch up with other competing countries. Infrastructure constraints, including power and transportation, are critical impediments for moving on to a higher growth path.

Bangladesh faces several downside risks to its near- to medium-term prospects. These include possible political disruption affecting the economy in the run-up to the general election in January 2007 and infrastructure constraints, including the power shortage. Externally, volatility in oil prices and stiff competition following the MFA phase-out pose significant risks.

Fiscal Management
Although fiscal management remains prudent, revenue collection has fallen short of projection. During July-October of FY2007, the National Board of Revenue collected only 8.1% more revenue than during the corresponding period of FY2006. To reach the ambitious revenue target growth of 17.1% in FY2007, tax efforts need to be intensified along with strengthened supervision and monitoring. Revenue needs to grow fast enough to allow resources to support human capital development, physical infrastructure, and implementation of poverty reduction programs, while maintaining debt sustainability.

The latest upward adjustments in petroleum prices in June 2006 will cut losses of Bangladesh Petroleum Corporation; but sizable losses remain, which are covered by subsidies. Even after this increase, prices of kerosene and diesel are about 70% of breakeven. These subsidies need to be phased out to divert resources to more productive uses in building physical and social infrastructure.

Monetary Developments
Despite a cautious monetary policy stance, broad money recorded high annual growth of 19.8% in September 2006. Strong growth in domestic credit sustained the economy’s growth momentum providing access to finance for working capital, raw materials, and capital machinery. Monetary conditions now need to be tightened to bring growth rates of broad money, and reserve money in line with Bangladesh Bank’s monetary program targets and contain inflationary pressures.

Balance of Payments
Exports continue to show robust performance with growth during the first quarter of FY2007 reaching 31.5% over the corresponding period of FY2006. Knitwear (35.9%) and woven garment (30.9%) exports surged sharply. Although import growth has picked up and was 19.8% in the first quarter of FY2007, it was much lower than the increase in exports. During the first quarter of FY2007, the current account surplus increased to $408 million from $132 million in the same period of FY2006 because of solid increase in exports and remittances.

Inflation
Although declining, inflation remains high because of the expansion of domestic credit and the rise in commodity prices in the international market. The point-to-point inflation rate declined from 7.5% in June 2006 to 6.9% in September 2006.

Capital Market
The major capital market indicators showed an uptrend during the first 4 months of FY2007. The Dhaka Stock Exchange general index went up to 1,541.65 at the end of October 2006, registering a 15% rise over June 2006. Market trading improved considerably during this period, suggested by a 54% increase in monthly turnover from June to October. But the political crisis significantly slowed trading activity in November 2006.

Related Document:
Bangladesh: Recent Political Developments

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