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No. 01/07
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25 February 2007
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Quarterly Economic Update, Bangladesh, December 2006
Dhaka, Bangladesh, 25 February 2007
Summary
Bangladesh continues to perform strongly with favorable macroeconomic fundamentals. Steady growth in exports and overseas workers' remittances contributed to building foreign exchange reserves. But weak revenue collection poses considerable risk to fiscal management. Sustaining higher growth will need significantly improved infrastructure.
Agriculture
The agriculture growth during FY2007 is likely to moderate from the post-flood high growth of preceding year. Aus, the first rice crop of the year, produced 1.51 million tons, lower than last year. Harvest of the second rice crop, aman is now complete. Although aman production is expected to be good, it is unlikely to reach FY2006 production of 10.8 million tons. For boro, an adequate supply of inputs, including fertilizer, and diesel and electricity for irrigation, must be ensured to exceed the previous year's bumper production. The outlook for maize, pulses, winter vegetables, spices, and fisheries is promising.
Industry and Services
The industry sector, lifted by export-oriented manufacturing, continues to show robust performance. Manufacturing uplift is indicated by robust growth in output, exports led by garment sector, import of industrial raw materials, and private sector credit. During the first five months of FY2007, output of medium-sized and large manufacturing enterprises increased by a robust 12.0% over the same period of last year. The output of small-scale manufacturing also registered strong performance with 11.4% growth in the first quarter of FY2007. But infrastructure constraints, particularly power shortages, held back the growth potential in manufacturing. The services sector continues to expand in line with rapid growth in industry.
Economic Growth
GDP is forecast to grow by 6.5% in FY2007, from 6.7% in FY2006. Growth is expected to moderate to reflect more normal agriculture growth following the post-flood high-growth of last year. Industry is expected to grow steadily, propelled by export-oriented manufacturing. The services sector is expected to record strong growth. But the country faces several downside risks in its medium-term prospects. These include infrastructure constraints, particularly power shortages.
Bangladesh needs to significantly improve infrastructure, including energy and transport, to sustain higher GDP growth over the near to medium term. The country faces a gigantic task to meet growing energy demand; this will require substantial investment and faster progress with reforms. There is an urgent need to move forward on the transport sector: to approve and carry out various agreed road sector policies and plans; improve operations of Chittagong Port; and to proceed with agreed railway sector reforms.
Fiscal Management
During the first 7 months of FY2007, taxes under the National Board of Revenue increased by only 9.1% compared with the annual target of 19.2%. Tariff reduction and political disruption, particularly in late 2006, affected revenue collection. The weak revenue outturn with the slowdown in aid disbursement exposed budget financing to considerable risks. This trend, if not restrained, might lead to significant overshooting of the annual borrowing targets. Despite revenue collection being far below projection, the overall budget deficit during FY2007 could be contained at 3.6% of GDP, given the underperformance in the annual development program.
Monetary Developments
Despite attempts to contain monetary expansion, money supply continued to grow rapidly mainly because of sharp expansion in domestic credit. Broad money (M2) grew by 22.3% annually to December 2006 compared with the 17.2% growth in December 2005. High growth in domestic credit was accompanied by a sharp rise in net foreign assets. Responding to higher credit demand, private sector credit growth increased to 19.4% and net credit growth to the Government increased to 35.9% in December 2006. Growth of credit to other public sector entities showed a declining trend because of reduced borrowing by Bangladesh Petroleum Corporation to finance oil imports.
Balance of Payments
Exports continued robust performance with 25.8% growth during the first half of FY2007. The impressive growth was led by knitwear growing at 32%, followed by frozen food at 26.7%, woven garments at 24.1%, and leather at 12.5%. Import growth increased sharply to 20.7% during July-November 2006 from moderate growth of 10.9% in the corresponding period of 2005. Aside food grain and fertilizer, imports of most of items increased. Despite the slightly larger trade deficit, the current account recorded a surplus of $302 million because of the surge in overseas workers' remittances.
Inflation
Growth in domestic credit, taka depreciation, and the rise in global commodity prices exerted inflationary pressures. The point-to-point inflation rate increased steadily to 7.3% in October 2006 from 6.8% in July 2006, but declined to 6.1% in December 2006. Movement in food prices was the main cause of changes in the inflation rate.
Capital Market
Monthly turnover of the Dhaka Stock Exchange increased to Tk16.19 billion in January 2007-a staggering 105% over December 2006 because of easing of the political situation. Daily turnover hit a record high of Tk1.59 billion on 31 January 2007. Despite the pickup, the market capitalization to GDP ratio remains only 7.5%, lower compared with other South Asian countries. Weak corporate governance, lack of good-quality shares, and inadequate or irregular participation by large institutional investors are mostly blamed for the stagnant capital market.
Read the full report.
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 67 members - 48 from the region. In 2006, it approved loans and grants for projects totaling $8.5 billion, and technical assistance amounting to almost $242 million.
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