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Quarterly Economic Update, Bangladesh, March 2007

Dhaka, Bangladesh, 15 May 2007

Summary The economic performance of Bangladesh continues to remain strong, driven by improved domestic and external demand. Robust growth in overseas workers' remittances contributed to favorable balance of payments outcome. Despite prudent fiscal management, revenue collection continues to be disappointing. Inflationary pressures heightened with rising food prices.

Agriculture
Agriculture growth during FY2007 is set to moderate from the postflood high growth of FY2006. Production of aus, the first rice crop of the year, was 1.51 million tons, lower than 1.75 million tons in FY2006. Aman cultivation was hampered in many parts of the country by the drought and shortage of inputs. This year's aman production is estimated at 10.6 million tons, lower than 10.8 million tons produced in FY2006. Despite the sterility of paddy reported in some districts and disruption in the delivery of key agricultural inputs, boro crop is estimated at 14.5 million tons, higher than the 14 million tons in FY2006. The outlook for summer fruits, pulses, winter vegetables, spices, and fisheries is promising.

Industry and Services
The industry sector continues to maintain robust performance because of steady growth in export-oriented manufacturing. The services sector is also expanding in line with rapid growth in industry. Measured by quantum indices, output of medium-sized and large manufacturing enterprises expanded by 11.2% during the first 7 months (July-January) of FY2007 compared with the same period in FY2006. The output of small-scale manufacturing also registered strong performance with first half of FY2007 production increasing by 11.2% compared with the same period of FY2006. The garment industry continues to thrive, driven by robust growth in knitwear and woven exports. The political disruption and blockades at the end of 2006 resulted in some order cancellations and the withdrawal of potential buyers. But the improved political situation and rapid turnaround in port efficiency after the transfer of the container terminal to the private sector is expected to yield better results in the coming months.

Economic Growth
GDP is projected to grow by 6.5% in FY2007, from 6.7% in FY2006 because of moderating agricultural growth following the postflood high growth of FY2006. The country faces several downside risks in its near- to medium-term prospects. These include political disruption affecting the economy and infrastructure constraints. The country needs to significantly improve infrastructure, including power and transport, to sustain higher GDP growth over the medium term. The country is facing an enormous challenge to improve the capacity of the Dhaka-Chittagong Transport Corridor to meet the demands of accelerating traffic. The corridor is facing serious congestion problems because of shortage of capacity and inefficient operation. These may be costing the country 20% of its foreign trade potential and reducing potential GDP growth by 1%.

Fiscal Management
Despite prudent fiscal management, revenue collection continues to be disappointing. Revenue collection by the National Board of Revenue (NBR) during July-March FY2007, increased by only 8.5% compared with the corresponding period of FY2006. Political disruption from October 2006 to early January 2007 in the lead-up to the formation of the caretaker Government and related uncertainties slowed economic activity and contributed to revenue shortfall. With a low revenue-GDP ratio of 10.6%, which is lower than in most countries in South Asia, the scope for increasing revenue is significant. Revenue must increase to mobilize resources for investment in infrastructure and human capital development and avoid debt burdens. Weak revenue outturn with the slowdown in aid disbursement exposed budget financing to considerable risks.

Monetary Developments
Although the central bank favored a cautious monetary policy, excess liquidity in the banking system aided by a sharp increase in net foreign assets resulted in broad money registering annual growth of 20% in February 2007. Domestic credit grew strongly at 18.7%, while net foreign assets increased by 42.1% because of the healthy growth of exports and remittances. Growth of credit to the Government increased considerably, largely to offset revenue shortfall. Private sector credit grew steadily, indicating underlying high domestic demand for credit. Consistent with this pattern of credit growth, reserve money increased at 27% during the period, up from 23.5% in the previous year.

Balance of Payments
Exports, driven by knitwear and woven garments, increased by 21.1% during the first 8 months of FY2007 over the corresponding period of FY2006. During this period, import growth was 21.0%. Although imports of rice declined, imports of wheat and other food items, oil, intermediate goods, and capital goods notably increased. During July-February FY2007, the current account of the balance of payments showed a surplus of $484 million, up from the surplus of $423 million in the corresponding period of FY2006. Robust growth in workers' remittances (27.6%) contributed to the surplus, offsetting the higher trade deficit. Foreign exchange reserves crossed $4,000 million in February 2007 and continued to increase to $4,538 million at the end of April 2007 from $3,484 million at the end of June 2006.

Inflation
Inflationary trends heightened during recent months with point- to-point inflation rising to 7.4% in March 2007, from 6.8% in July 2006. During this period, food inflation increased from 7.4% to 8.5%, while nonfood inflation declined slightly to 5.8% from 5.9%. Acceleration in food inflation is mainly attributed to higher food-grain prices in both the domestic and international markets, together with reduced imports and lower domestic production of food grains. High monetary and private sector credit growth also fueled inflationary pressures. The drive against hoarding and administrative efforts to control prices of essentials might have added to inflation by disrupting import and supply.

Read the full report [ PDF: 374kb | 29 pages ].

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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