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News Release

Quarterly Economic Update
September 2008,
Dhaka, Bangladesh
(Released on 5 December 2008)

Summary

The global financial crisis will put a mild brake on Bangladesh's economic growth rate for fiscal year (FY) 2009, although continued strength in its agriculture and industrial sectors will limit the downside. After recovering from natural calamities and external oil and commodity price shocks in the previous year, gross domestic product (GDP) growth of 6.5% was initially projected for FY2009, supported by robust agriculture and manufacturing growth, and sustained expansion of the services sector. However, with dampened global demand expected to weigh on exports and remittances, GDP growth in the current fiscal year is now projected to come in within a range of 5.5% to 6%. In FY 2008, the economy expanded by 6.2%. In order to keep the country on a strong growth path, there is a need to boost the economy's productive capacity over the longer term. To do this, public investment must be increased by accelerating implementation of the annual development program (ADP). Measures to mitigate the impact of climate change - which poses a major threat to growth in Bangladesh - must also be integrated into economic development plans and activities. In addition, the next government must accelerate economic reforms to enhance growth, create jobs, and sustain progress in poverty reduction.

Agriculture

The growth target for agriculture in the current fiscal year is 4.0%, unchanged from earlier forecasts and against actual growth of 3.6% in FY2008. Production of rice and wheat is targeted at 34.3 million tons (rice, 33.3 million tons and wheat, 1 million tons), up 15% from actual output in FY2008. Favorable weather conditions, more land under cultivation, wider use of high-yielding seeds, and various government support programs will boost output in the current fiscal year. In addition, the poultry subsector seems to have recouped losses caused by the outbreak of avian flu, while the fisheries subsector is also expected to grow strongly in response to rising demand and improved competitiveness.

Industry

Industry has performed relatively well so far this fiscal year, supported by further growth in readymade garment output, along with continued recovery in housing and construction, and improved business confidence. However the unfolding financial crisis will cause a modest slowdown in demand and as a result industrial growth for the year is now seen coming in between 6.7% to 7.2% against the 7.9% projected previously. In FY 2008, industrial output expanded by 6.9%. To sustain the relatively strong growth rate, steps will need to be taken to urgently address shortages in power and gas supplies. Without such action, power cuts and irregular supplies will constrain industrial production, affecting small- and medium-scale industries the most since - unlike larger producers - they are unable to afford their own generators. Investment to improve other infrastructure, such as roads, ports and urban services is also essential for rapid industrial development.

Services

The services sector is now expected to grow 5.7% to 6.2%, down from 6.8% projected previously. In FY 2008 the sector grew 6.7%. The sector is likely to see some mild pressure from a slowdown in exports and domestic demand, stemming from the global crisis. At the same time it is expected to benefit from the continued expansion of agriculture and industry, in particular from rapid growth in the mobile phone market and an increasing number of health care service providers. Profit margins of private sector banks also remain healthy and are likely to support growth in the financial services subsector.

Inflation

Inflation is likely to remain within the previous projection of about 9.0% for FY 2009, with an earlier surge in commodity prices offset by a recent pullback. The inflation rate grew 10.2% year-on-year in September 2008 from 10.0% in June, before easing back to 7.3% in October as a result of a fall in food and other commodity prices. In the coming months, the inflation trend will depend on several factors, including possible pressures resulting from higher spending in the run up to the forthcoming national elections. The sharp decline in international commodity and intermediate goods prices should reduce domestic prices, although importers may adopt a cautious approach in opening letters of credit, fearing they will sustain losses if domestic prices turn out lower than import prices. This could lead to supply shortages that would generate further upward price pressure. It appears that international prices are set to stabilize at lower levels than seen earlier in the year, which will help reduce overall inflationary pressure.

Fiscal Management

The fiscal deficit for FY 2009 is projected at 4.9% of GDP in line with the original budget target, with revenue collected by the National Board of Revenue (NBR) up 18.8% in the first quarter from the corresponding period a year ago. Sustaining high revenue growth will depend on continued strong economic activity. ADP implementation in past years has been hindered by weak institutional capacity and delays in project formulation, while natural calamities and efforts to reduce corruption in project implementation, also weighed on implementation. Capital spending needs to be stepped up by addressing capacity constraints and improving interagency and aid coordination so that infrastructure can support increased private investment and help address the country's development needs. To reduce fiscal pressures, the numerous direct and quasi-fiscal subsidies to state-owned enterprises should be re-examined as the growing costs undermine fiscal management.

Monetary and Financial Sector Developments

Broad money grew 23.5% year-on-year in September 2008, up significantly from growth of 15.9% in September 2007. The expansion was driven by high growth of 24.6% in domestic credit, although net foreign asset growth moderated to 11.5% from 51.1% in September 2007. The sharp growth rate in September prompted Bangladesh Bank, to raise the reverse repo rate in November 2008 from 6.5% to 6.75% to slow the pace of monetary expansion. The central bank's continued efforts to strengthen its regulatory and supervisory oversight of banks and other financial institutions, improve its surveillance of the financial sector, and enhance the quality of financial data will help to contain some of the adverse effects of the global financial crisis on the domestic financial sector. To ensure financial stability and absorb external shocks, a better balance in liquidity management must be maintained and greater attention paid to credit quality.

Balance of Payments

Although export earnings and remittances could slow going forward because of the global financial crisis, this is likely to be offset by falling prices of key commodities, such as food grains, edible oils, petroleum, and steel, which would moderate the import bill. As a result the current account is expected to remain in surplus in FY2009, helping underpin macroeconomic stability. Exports remained robust in the July-September quarter, growing 42.4% year-on-year, and while demand for textiles to major destinations may slow, it is unlikely to fall sharply in the near term. Import payments for July-August 2008 rose 36.9% over the same period in the previous year, while total remittance receipts for July-October 2008 rose 36.8% year-on-year. Most overseas workers are unskilled or semi-skilled, and are involved in low-end jobs, which are less likely to be seriously affected at the beginning of a global economic slowdown. The gross foreign exchange reserves of Bangladesh Bank fell to $5.6 billion (equivalent to about 3 months of imports) at the end of October 2008, from $5.8 billion at the end of July.

Exchange Rates

The weighted average nominal exchange rate (taka/dollar) remained stable between Tk68.5-Tk68.6:$1 during the first quarter of FY2009. The exchange rate showed little volatility in the face of the global financial crisis, in part as a result of periodic interventions by Bangladesh Bank in the foreign exchange market. With currency convertibility limited to current account transactions, the risk of capital flight and consequent exchange rate instability are minimal.

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