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News Release

Quarterly Economic Update, Bangladesh, March 2008

Dhaka, Bangladesh, 18 May 2008

Summary
Severe floods, a cyclone, and low business confidence affected the economy during the first half of FY2008. But the economy rebounded in the second half with timely and effective measures by the Government to restore business confidence and boost agriculture production. Despite a good revenue performance, large subsidies pose significant fiscal challenges. Higher external aid flows and workers' remittances provided a cushion to the external balance. Food price shocks affected the economy with macroeconomic and poverty impacts.

Agriculture
The floods and cyclone caused extensive damages to the agriculture sector by affecting crops, livestock, poultry and fish farms. Aman production in FY2008 is estimated at 9.7 million tons compared with 10.8 million tons in FY2007. Boro production is expected to be 16.5 million tons, 10% higher than the preceding year. Encouraged by higher prices of food grains and desperate need to recoup the aman loss, farmers across the country brought more land under boro cultivation. The yield is good due to the increase in land fertility following the floods and the weather remained favorable. The Government launched massive rehabilitation after the floods and cyclone to ensure adequate supplies of inputs to farmers. Bangladesh, a net importer of food grains, has been seriously affected by food price shocks, driven by higher international prices and domestic production shortfall following successive natural disasters. Despite a bumper boro crop, risks of a supply shortage are possible if the next aman and boro crops are affected by natural disasters or other factors. Over the short-term, the focus of policy responses should be on targeted interventions to protect the poor and vulnerable in the face of rising food prices. Over the medium to longer term, the focus should be on improving agricultural productivity.

Industry and Services
During the first half of FY2008, the industry sector was affected by sluggish investment and low export-oriented manufacturing activity. Erosion in business confidence and slowdown in external demand for garments affected manufacturing. But in the second half of FY2008, the industry sector is rebounding as indicated by the uptrend in export-oriented manufacturing with effective measures taken by the Government to restore business confidence. Construction is likely to show a downtrend in FY2008 because of a sharp increase in the price of construction materials including mild steel rod, cement, brick, bitumen and paint. Rising prices of construction materials also affected the implementation of ADP. Growth in services sector has picked up and is continuing its past growth momentum.

Economic Growth
GDP is expected to grow by 6% in FY2008, down from 6.5% in FY2007 because of moderating agricultural growth following the extensive flooding and cyclone. The fear and uncertainty among the investor community, apparently created by the Government's comprehensive anticorruption drives, have started to ease. The country has high growth potential. But there are several downside risks in its near- to medium-term prospects. These include political uncertainty, weak infrastructure, vulnerability to natural disasters and volatility in oil and food-grain prices.

Fiscal Management
Revenue performance improved after several years of poor performance. Government revenue collection by the National Board of Revenue rose by 23.1% in July–March FY2008 over the corresponding period of FY2007. But sustaining this improvement in revenue collection will depend on the rebound of private sector activity and strengthening tax administration. The fiscal deficit in FY2008 is likely to increase to 4.8% of GDP compared with 3.2% in the preceding year. The pressures on the fiscal balance amplified because of postflood and post cyclone relief and rehabilitation expenditures; and a sharp rise in subsidies following the rise in fuel, fertilizer and food grain prices in international markets. Slow progress in implementing the annual development program continues to undermine the efficiency of public expenditure.

Monetary and Financial Sector Developments
Broad money growth declined to 15.2% in February 2008, down from 20% in February 2007. This was caused by a decline in the growth of domestic credit, mainly the credit to the Government. But private sector credit growth increased, showing significant pick up in credit to trade and industry sectors. Banks’ gross nonperforming loans (NPLs) remained almost unchanged (13.2%) at the end of December 2007 compared with the end of December 2006. But the NPLs of state-owned commercial banks at 29.9% and specialized banks at 28.6% remained high. The interest spread of the banking system remained high at 6% showing banking system inefficiencies and market segmentation which needs to be contained.

Balance of Payments
Exports rebounded with the recovery in garments exports. Growth in total exports during July–March FY2008 reached 12.4%, driven by woven garments and knitwear exports. Imports during July–February FY2008 rose sharply by 21% over the corresponding period of FY2007. Higher import bills amplified by rising international commodity prices, pushed the trade deficit to $3.2 billion during July–February FY2008, up from $2.1 billion during July–February FY2007. Despite a surge in the trade deficit, a sharp rise in current transfers, particularly workers’ remittances, resulted in a surplus of $328 million in the current account. Even with growing pressure on the current account, the foreign exchange reserve stood at $5.8 billion at the end of April FY2008, up from $5.1 billion at the end of June FY2007, aided by higher net foreign aid receipts.

Inflation and Exchange Rates
Higher international food and nonfood commodity prices and shortfall in domestic food grains production heightened inflation. Bottlenecks in the distribution and retail management chain, monetary accommodation of previous years, and panic buying also pushed inflation higher. On an annual average basis, the inflation rate reached 10% in March 2008, up from 7.2% in June 2007. The weighted average nominal exchange rate remained stable at Tk68.6:$1 since November 2007. This is helping to dampen inflationary pressures partly by cutting import costs, especially food items.

ADB, based in Manila, is dedicated to reducing poverty in the Asia and Pacific region through inclusive economic growth, environmentally sustainable growth, and regional integration. Established in 1966, it is owned by 67 members – 48 from the region. In 2007, it approved $10.1 billion of loans, $673 million of grant projects, and technical assistance amounting to $243 million.

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