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News Release

Quarterly Economic Update, Bangladesh, December 2007

Dhaka, Bangladesh, 28 February 2008

Summary
Severe floods, a cyclone, and low business confidence affected the economy. But an economic turnaround is expected in the second half of FY2008. Exports are gradually increasing with an uptrend in knitwear exports. Underpricing of energy products poses a major fiscal risk. Despite pressures on the current account, foreign exchange reserves remain comfortable. Containing high inflation remains a major challenge.

Agriculture
Agriculture growth in FY2008 is likely to moderate because of serious flooding and a cyclone. The floods and cyclone caused extensive damages to the agriculture sector by affecting crops, livestock, poultry and aquaculture. Aman production in FY2008 is estimated at 9.6 million tons compared with 10.8 million tons in the preceding year. If the weather remains favorable and adequate inputs are ensured to farmers, an increase in boro production is expected to partly compensate for the loss of the aman crop. The Government is providing huge subsidy to supply fertilizer to the farmers at lower prices. But farmers in most places pay higher prices to procure needed fertilizer. Fertilizer distribution system needs to be streamlined to improve performance of the fertilizer market.

Industry and Services
Erosion in business confidence and slowdown in external demand for the garments affected manufacturing. Output of medium- and large-scale manufacturing rose by only 3.5% in the first 5 months of FY2008. But the output of small-scale manufacturing, which caters mostly to the domestic market, has not been affected by the slowdown in external demand, and erosion in business confidence as indicated by annual 8.1% growth in the first quarter of FY2008. Construction suffered a setback because of recent drives against corruption and an increase in the price of construction materials. But growth in the power subsector seems to be steady. A turnaround in industry and services sectors is expected in the second half of FY2008 as indicated by recent recovery in exports and growth in private sector credit.

Economic Growth
GDP growth is expected to be below 6% in FY2008 compared with 6.5% in the previous year, because of erosion of business confidence, extensive flooding and the cyclone, and a slowdown in external demand for garments. The growth outlook points to the need to boost business confidence, restore flood and cyclone-affected infrastructure and livelihoods, and augment external competitiveness.

The anticorruption drives of the caretaker Government, which apparently created some fear and uncertainty among the investor community, have started to ease. The caretaker Government recognized the problem and undertook several measures to boost business confidence.

Fiscal Management
Revenue performance continues to be buoyant, underpinned by vigorous tax collection and reform measures. Government revenue collection by National Board of Revenue increased by 24.6% in July–January FY2008 over the corresponding period of FY2007. Sustaining this commendable revenue performance will depend on restoring business confidence and subsequent rebound of private sector activity. The fiscal deficit is likely to increase to 4.7% of GDP in FY2008 compared with 3.2% in the preceding year. The rise in subsidies following the increases in oil and fertilizer prices in international markets amplified pressures on the fiscal balance. Slow progress in implementing the annual development program, the main vehicle for implementing the Government’s development agenda, continues to undermine the efficiency of public expenditure.

Monetary and Financial Sector Developments
Broad money growth reached 14.7% in December 2007 down from 22.3% in December 2006. This was fostered by a decline in the growth of domestic credit, mainly the private sector credit. The slowdown in private sector credit growth is attributed to uncertainty and low business confidence rather than tightening of monetary policy. Banks’ gross nonperforming loans (NPLs) to total advances marginally declined to 14.0% at the end of September 2007 from 14.3% at the end of September 2006. The NPLs of nationalized commercial banks (26.9%) and specialized banks (31.8%) remained high because of a variety of government interventions, inefficiency, and lack of competitiveness. The interest spread of the banking system remained high at 6.1%, indicating banking system inefficiencies and market segmentation.

Balance of Payments
After a setback during July–September FY2008, exports recovered during October–December with a 15.4% growth because of an uptrend in knitwear exports. On a cumulative basis, growth in exports in the first half of FY2008 was 4.4%. Gaining and sustaining momentum in exports require boosting competitiveness, capturing new markets, diversifying the export basket, and moving toward higher value products. During July–November FY2008, imports increased by 17.5% compared with the same period of FY2007. Despite healthy growth in workers’ remittances, the rise in the trade deficit turned the current account to a deficit during July-November FY2008 from a surplus last year. Even with growing pressure on the current account, the foreign exchange reserve stood at $5.4 billion at the end of January FY2008, up from $5.1 billion at the end of June FY2007, aided by higher net foreign aid receipts.

Inflation
Inflationary pressures continue to heighten because of the shortfall in domestic production, aggravated by higher food prices in international markets. On a point-to-point basis, inflation increased to 11.6% in December 2007 from 10.1% in July 2007. The pressure on the nominal exchange rate (taka/dollar) moderated, showing the healthy buildup of foreign exchange reserves. The weighted average nominal exchange rate slightly appreciated during the past year. The real effective exchange rate of the taka also appreciated, moderating the country’s external competitiveness.

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