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News Release

Quarterly Economic Update, Bangladesh, June 2008

Dhaka, Bangladesh, 18 September 2008

Summary
Despite the damage caused by floods and cyclone, the economy rebounded during the second half of FY2008 to push the annual GDP growth rate up to 6.2%. Growth was bolstered by strong private consumption and a surge in remittance inflows, while export growth also recovered during the second half of the year. Strong revenue performance was aided by reform-oriented interventions, which helped to contain the fiscal deficit in the face of unanticipated spending pressures arising from higher food and oil subsidy costs. Containing high inflationary expectation remains a major challenge, and there are risks that the Bangladesh Bank’s accommodative monetary policy could fuel inflation if bank credit is not channeled to the economy’s productive sectors. The emerging power shortage is a major roadblock to industrial expansion that needs to be addressed urgently. The evolving gas shortage will become a bigger impediment to economic activities, requiring immediate measures to step up exploration along with steps to develop the country’s high quality coal resources. Several downside risks could derail positive economic outcomes, particularly higher global oil and commodity prices that could stress the balance of payments and fiscal positions. Political uncertainty and natural disasters could also constrain economic growth.

Agriculture
Agriculture grew at 3.6% in FY2008, after recovering from losses caused by the two floods and cyclone in the first half of the year. The recovery was led by a bumper boro crop helped by good weather and timely Government support. Compared with the preceding year’s growth of 4.6%, this year’s performance was notable considering the effects of the repeated natural disasters. Although growth in animal farming declined sharply because of the outbreak of avian flu, forestry and fishing also posted higher growth than in FY2007. Despite government subsidies on key agricultural inputs, the costs of production increased throughout FY2008, dampening farmers’ capacity to respond to the higher prices.

Industry
Industry sector growth declined to 6.9% from 8.4% in FY2007. After weak performance in the first half of FY2008 because of slow growth in production and export of garments and knitwear—the industrial mainstays—growth rebounded in the second half following a surge in exports, rise in private sector credit, and gain in business confidence. Nonetheless, the escalation of import prices of industrial raw materials and intermediate inputs in the international market slowed industry sector growth relative to the previous year. Manufacturing growth was affected by infrastructure constraints, particularly power shortages. Growth in construction declined to 5.9% from 7% because of the higher price of construction materials and downsizing of the annual development program (ADP). Because of higher backward and forward linkages, slower construction activity affected other economic activities and provided fewer jobs for construction workers.

Services
The services sector grew at 6.7% in FY2008 compared with 6.9% in FY2007. Slower agriculture and industry growth in the first half of the fiscal year constrained growth of services. The pickup in services growth in the second half of FY2008 was aided by expansion in transport and storage, mobile phone services, and wholesale and retail trade linked to higher imports and consumption spending. Transport, storage, and communication services grew at 8.7% in FY2008, up from 8% in FY2007. Wholesale and retail business increased by 7.2%, while post and telecommunication services grew by 23.4%. Growth in real estate and housing services dipped to 3.6% from 3.8% in the previous year because of increased prices for land and raw materials, and the broad-based anticorruption drive that prompted buyers to become more cautious about revealing their sources of income.

Inflation
Inflation edged up to 10% on a moving average basis in March 2008, and remained at almost the same level (9.9%) in June 2008. Food inflation rose to 12.3% in June from 11.1% in January, while nonfood inflation declined to 6.3% from 7.3% in January. On a point-to-point basis, inflation declined to 10% in June from 11.4% in January 2008. For FY2009, inflation is projected at 9% in Bangladesh Bank’s Monetary Policy Statement (MPS) issued in July 2008. The MPS stresses that higher economic growth and increased production of essential food and other items, made possible by expanding credit to the productive sectors of the economy, would soften inflationary pressures. Substantial risks are involved in this supply-side approach to stabilize the economy as its first-round effects through expanding credit without a quick supply response could trigger high inflation. The supply shortage could be aggravated if crop production is affected by natural disasters.

Fiscal Management
In FY2008, revenue collection jumped to 11.2% of GDP, 1.0 percentage point higher than in FY2007. On the expenditure side, despite the cut in the ADP, additional spending for relief and reconstruction, expanded safety net programs because of the rise in the price of rice, and higher subsidies for fuel and fertilizer pushed public spending up to 15.9% of GDP from 13.4% in FY2007. The downsizing of the ADP over the past few years is a cause for concern as it will affect private investment and growth. The tax to GDP ratio (at 8.9%) remains low even compared with other South Asian countries, constraining noninflationary expansion of spending. In FY2008, the fiscal deficit widened to 4.7% of GDP compared to 3.2% in FY2007 and the original budget projection of 4.2%.

Monetary and Financial Sector Developments
Bangladesh Bank continues to pursue an accommodative monetary policy to ensure steady flows of credit to the economy’s productive sectors. Responding to the pickup in demand, growth in broad money and private sector credit reached 17.6% and 25.2%, respectively, in June 2008, in both cases higher than the program target of 16%. Growth of net credit to the Government was also high at 30.4%, year-on-year, in June 2008 despite the robust growth in revenue. Nonperforming loans (NPLs) are still high despite progress in reducing them since 2005. In the first quarter of 2008, NPLs comprised 13.2% of outstanding loans compared with 13.8% during the same period of the preceding year. The high NPLs are contributing to high lending rates, which undermine the efficiency of the banking system, discourage investment, and hinder economic growth.

Balance of Payments
In FY2008, exports recorded robust growth of 15.9% growth, driven by a rise in knitwear and woven garment exports. Imports in FY2008 rose by 26.1% driven by the sharp rise in food-grain imports. Consequently, the trade deficit widened substantially (by 60.2%) during FY2008. The robust growth in workers’ remittances (32.4%) offset the higher trade deficit and resulted in a current account surplus of $672 million (0.9% of GDP). The capital account surplus declined from $1.3 billion in FY2007 to $145 million in FY2008 because of lower FDI and sizable net outflows in other short-term loans and trade credits, which include the excess of shipments over receipts from exports and suppliers’ credits. The overall balance in FY2008 declined sharply to $604 million from $1,493 million in FY2007 because of the lower capital account surplus. At end-June 2008, foreign exchange reserves amounted to $6.1 billion (3.2 months of imports), rising by $1.1 billion during the fiscal year.

Exchange Rates
The nominal dollar/taka exchange rate remained mostly stable in FY2008, underpinned by strong remittances, robust export growth, and higher inflows of foreign aid. Bangladesh Bank intervened periodically in the foreign exchange market to preserve exchange rate stability.

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 2007, it approved $10.1 billion of loans, $673 million of grant projects, and technical assistance amounting to $243 million.

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