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No. 05/07
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26 November 2007
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Quarterly Economic Update, Bangladesh, September 2007
Dhaka, Bangladesh, 26 November 2007
Summary
Severe flooding and cyclone, and a slowdown in external demand adversely affected the economy. The growth outlook points to the need to boost business confidence, and restore livelihood and infrastructure affected by the flood and cyclone. Although revenue performance improved, challenges in fiscal management remain. Despite pressures on the current account, foreign exchange reserves remain comfortable. Inflation continues to remain high.
Agriculture
Agriculture growth in FY2008 is likely to moderate because of serious flooding during July-September of 2007 and a devastating cyclone in mid-November. The floods and cyclone caused extensive damages to the agriculture sector by affecting crops, livestock, poultry and aquaculture. Production loss because of flooding is estimated at 1.3 million tons. In mid-November 2007, a severe cyclone damaged 38% of aman planted areas in the coastal districts. The effect of this year's flooding and cyclone on agriculture sector could be substantial unless the losses are offset by a bumper boro crop.
Industry and Services
During FY2007, the industry sector recorded robust growth of 9.5% caused by a steady expansion in export-oriented manufacturing and a rise in domestic demand. But the first quarter data of FY2008 indicates a slowdown in export-oriented manufacturing because of a drop in external demand. Garment, the country's key export industry, which experienced robust performance over past years, showed downtrends during recent months. An erosion in business confidence also affected manufacturing. Construction has decreased because of the anti-corruption drives and increased prices of construction materials. Similarly, a slump is evident in services sector which grew by a strong 6.7% in the preceding year. But a turnaround in economic activity is expected in the second half of FY2008.
Economic Growth
GDP growth is expected to be below 6% in FY2008, compared with 6.5% during the previous year, because of extensive flooding and cyclone, and a slowdown in external demand for garments. The growth outlook points to the need to boost business confidence. The economic prospects will depend on postflood and postcyclone rehabilitation, recovery of the garment sector, and political stability in the lead-up to the general elections scheduled for the end of 2008. The severe cyclone of mid-November 2007 added to the uncertainty for economic prospects.
The extensive anti-corruption drive and eviction of illegal businesses caused some fear and uncertainty among the business and investor community, and dampened new investment. Restoring business confidence is a challenge to sustaining private sector-led economic growth. The Government reassured the business community that the anticorruption drive will be properly targeted to restore confidence, and has taken several measures to improve business confidence in the country.
Fiscal Management
Although revenue performance improved, the challenges in fiscal management remain. The losses of state-owned enterprises (SOEs) and associated quasi-fiscal obligations pose a significant fiscal risk. Administrative prices of fuel, electricity, and fertilizer cause much of the SOEs losses. The revenue collection by the National Board of Revenue increased by 21.8% in July-October FY2008 over the corresponding period of FY2007. The vigorous tax collection measures by NBR contributed to the impressive revenue performance. In the FY2008 budget, the fiscal deficit is projected at 4.2% of GDP compared with 3.2% in the preceding year. The pressures on the fiscal balance are likely to be amplified because of a rise in expenditures for the relief effort, expansion of food-assisted safety nets, and imports of food grains and fertilizer.
Monetary and Financial Sector Developments
Broad money growth reached 15.9% in September 2007, down from 22.3% in December 2006. This was fostered by a decline in the growth of domestic credit despite a continued uptrend in the growth of net foreign assets of the banking system because of a surge in workers' remittances. Growth in private sector credit slowed because of uncertainty and poor business confidence rather than tightening of monetary policy. The growth in net credit to the Government slowed with the steady rise in revenue collection. But the growth in credit to other public sector enterprises increased sharply caused by a rise in bank borrowing by SOEs.
Balance of Payments
Exports increased in September 2007 after a setback during July-August 2007. But exports in July-September FY2008 fell by 5.4% compared with the corresponding period of preceding year, driven by downtrend in two major exports, woven garments and knitwear. Based on opening of letters of credit (L/C) during July-September FY2008, imports rose by 26% over the corresponding period of the previous year. Imports of food grains, intermediate goods, and industrial raw materials increased significantly. Despite an increase in workers' remittances, the surge in the trade deficit mounted pressures on the current account. Rising oil and food grain prices threaten the balance of payments outlook of many developing countries including Bangladesh. But the workers' remittances continue to provide a cushion to the external balance in Bangladesh. During the first 4 months of FY2008, remittances grew by a robust 28.4%.
Inflation
In September 2007, on a point-to-point basis, inflation remained high at 9.6%. The rise in international commodity prices, domestic food grain shortfall, and the drive against corruption and hoarding amplified price pressures.
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