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Bangladesh's Economy to Grow 6% in FY2007

Dhaka, Bangladesh, 6 September 2006

Despite mounting external pressures, Bangladesh's economy is forecast to grow 6% in FY2007, slightly lower than 6.7% in FY2006, according to a major Asian Development Bank report released here today

Asian Development Outlook 2006 Update, an update of ADB's flagship publication Asian Development Outlook 2006 issued in April, indicated that the moderation in GDP growth would result mainly from a return to more normal growth in agriculture following the post-flood high-growth recovery of FY2006.

Despite the generally positive outlook though, substantial under pricing of energy products is continuing to build large financial imbalances, which are posing a growing threat to both fiscal and monetary stability. Other risks include political uncertainty that could disrupt the economy in the lead up to general elections due in January 2007.

Conditions for expansion in industry—aided by new capacity in garments and textiles, chemicals, and engineering—as well as in services are expected to be favorable, though the issue of frequent power disruptions needs to be addressed. The two main challenges facing the thriving garment industry are social compliance issues (as epitomized by recent labor unrest over wages) that are a concern to many international buyers, and progress in relieving infrastructure constraints.

ADO Update raises the average inflation forecast to 7.0% in FY2007. Apart from international price rises and Taka depreciation, inflationary pressures are likely to stem from further upward adjustments to domestic oil prices, though these may well come only after the January 2007 elections.

Despite recent increase in domestic petroleum prices, subsidy remains substantial posing considerable risks to fiscal sustainability, ADO Update notes. On the basis of Bangladesh Petroleum Corporation's mid-June 2006 cost and selling prices, the implicit subsidy per liter of fuel was $0.24 for diesel and $0.23 for kerosene. This translates into an annual implicit subsidy for these two fuels of $810 million in FY2007 (about 1.3% of GDP), which will apparently add heavily to the Government's existing obligations to Nationalized Commercialized Banks.

To deal with soaring international oil prices, the country needs to adopt a new pricing system that will regularly set retail prices closer to international levels, and provide a budget-supported safety net for the poor, according to ADO Update.

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 66 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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