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News Release

Quarterly Economic Update, Bangladesh, December 2008
Dhaka, Bangladesh
(Released on 2 March 2009)

Summary

The global financial crisis is yet to significantly affect Bangladesh. However, pressures from the global slowdown are building up with signs of moderation in growth. Economic performance in the July-September of FY2009 had held up reasonably well with steady progress in domestic economic activity and satisfactory growth in exports and remittances. Growth in ready-made garment production, together with improved business confidence and recovery in housing and construction, stimulated industrial activity. Services, especially wholesale and retail trade and transport and telecommunications, also performed well. In the October-December ending December 2008, export growth decelerated affecting the export-based industrial production, and remittances growth also moderated. The agriculture sector nonetheless looked poised for robust growth, aided by favorable weather conditions and proactive policy support from the Government. Before the onset of the global financial crisis, a 6.5% growth target for FY2009 appeared attainable. With the financial crisis in the advanced economies unfolding and recession appearing to last longer than earlier anticipated, a growth rate in the range of 5.5%-6.0% seems more likely in FY2009.

Agriculture

In the first half of FY2009, climate conditions remained favorable and strong government support was reaffirmed for boosting agriculture sector growth. As a result, agriculture sector is expected to attain the target growth rate of 4.0%, up from the actual growth of 3.6% in FY2008. Production of rice and wheat for FY2009 is targeted at 34.3 million tons (rice, 33.3 million tons and wheat, 1 million tons), a 15.1% rise from actual production in FY2008. Bumper harvests of -aman- (monsoon) rice, maize, wheat, and potato in FY2009 have already been reported. Favorable outlook is maintained also for the upcoming -boro- (dry season) rice crops because of good weather conditions together with strong support from the Government to ensure availability of key agricultural inputs. The prospects for output of various non-crop sub-sectors of agriculture also appear bright. The fishery sub-sector has performed well because of growing domestic demand.

Industry

Aided by the robust export growth of 42.4% in the July-September of FY2009, the ready-made garment production, together with improvements in business confidence and recovery in housing and construction, stimulated industrial activity. However, exports declined (-1.4%) in the October-December of FY2009 implying slowdown in export-based industrial production. On the contrary, falling prices of construction materials and a rise in demand for real estate because of the growth in bank credit and higher remittances helped to revive the construction sub-sector. To promote the industry sector, the prevailing shortages in power and gas supplies need to be urgently addressed. The lack of gas supplies will also constrain power generation and new investment in manufacturing activities. The country's export-based industry sector is likely to experience a slowdown in the coming months. Industrial growth is thus expected to be in the range of 6.6%-7.2% compared with 6.9% in FY2008 with production for exports continuing the slowing trends that became evident in the October-December of FY2009.

Services

Services, especially wholesale and retail trade and transport and telecommunications, performed well in the July-September of FY2009. The satisfactory performance of agriculture and industry has contributed to healthy services sector growth. In the October-December, escalation in demand for services during the parliamentary elections, contributed to boost retail trade in both rural and urban areas. Profit margins of private sector banks remain quite healthy, and are likely to have a positive impact on growth of financial services. However, the global financial crisis will have an adverse impact on the services sector as well, because of effects on industry, particularly related to exports and compression of domestic demand in general. Services growth will slow to 5.8%-6.2%, down from 6.7% in FY2008, due to lower activities in the export sector and declines in consumption spending induced by lower income and moderation in remittance growth.

Inflation

Inflation moved steadily downward as the October-December of FY2009 unfolded, sliding from 10.2% year-on-year in September to 6.0% in December. The rapid decline in international commodity prices and improved domestic food supplies are the main factors pushing inflation lower. The decline in food inflation (6.8% in December from 12.1% in September) was steeper than that for nonfood inflation (4.8% in December from 7.2% in September). The cut in the domestic administered price of oil in October and December 2008, after a rise in July, also helped to ease price pressures. The likely good domestic crop harvests, the effects of raising policy rates by the central bank for restraining credit in the October-December of FY2009, and the January 2009 reduction in the domestic fuel prices will also ease inflation. Inflation is projected at about 7.0% for the year as a whole, down from 9.9% in FY2008.

Fiscal Management

Government revenues are showing signs of deceleration, with the growth of revenue collections falling from 20.5% during July-September of FY2009 to 13.2% during July-December, over the corresponding periods of FY2008. Slower private sector activity, as the impact of the global economic slowdown takes hold, could further affect revenue collection. Import-based revenues will be affected by the cuts in customs duties in the FY2009 budget and the erosion in import values resulting from the decline in international commodity prices. A major challenge to the new government is to raise utilization rate of Annual Development Program (ADP). Both quantity and quality of ADP need to be stepped up by addressing capacity constraints and better interagency and aid coordination, so that infrastructure provision can support increased private investment and help address the country's development needs. Despite the recent rise in subsidy on fertilizer, the budget deficit is expected to be around 4.7%, within the budgeted level of 4.9%.

Monetary and Financial Sector Developments

Bangladesh Bank maintained an accommodating monetary policy stance with little adjustment in policy rates to support high economic growth and to contain inflation within tolerable levels. Broad money growth reached 17.9% year-on-year in December 2008 up from 14.7% in December 2007. Private sector credit grew rapidly at 21.8% year-on-year in December 2008 compared with 16.8% in December 2007. In mid-January 2009, Bangladesh Bank announced the Monetary Policy Statement (MPS) for the January-June FY2009 period with a commitment to continue its support to maintain the flow of credit to raise production of goods and services; and provide refinance against lending in employment-intensive sectors such as agriculture and SMEs. The ratio of gross nonperforming loans (NPLs) to total loans of all banks declined to 12.3% at the end of September 2008 from 14% at the end of September 2007. However, NPLs of the state-owned commercial banks (SCBs) rose from 26.9% to 29.3% during the period. Weighted average lending rates continued to fall and stood at 12.4% at the end of September 2008. The interest rate spread reduced from 6.2% in September 2007 to 5.2% in September 2008.

Balance of Payments

Though export sector performance was robust (42.4% growth) in the July-September of FY2009 (July-September 2008), exports declined by 1.2% in the October-December. On a cumulative basis however, export growth in the first half of FY2009 was still robust at 19.4%, as against 4.4% in the same period of FY2008. Preventing a sharp decline in export earnings in the face of the cooling global demand in the coming months will be a major challenge for the Government. During July-December of FY2009, imports rose by 23.2% over the same period of FY2008. Total remittance receipts during July-January FY2009 rose by 29.4% over the same period of the preceding fiscal year. The annual growth (5.1%) in the number of workers leaving Bangladesh for overseas jobs slowed in 2008 compared with growth of 118.2% in 2007. The trade deficit edged up to $2.9 billion in the first half of FY2009, up from the $2.2 billion deficit in the corresponding period of the previous year. Higher deficits in trade and service payments reduced the current account surplus to $232 million from $298 million in the same period the year before. Because of the higher surplus in the financial and capital accounts, the overall balance showed a higher surplus of $489 million in July-December 2008 against a surplus of $44 million in July-December 2007. Gross foreign exchange reserves of Bangladesh Bank were lower at $5.8 billion (equivalent to about 3.3 months of imports) at the end of December 2008, down from $6.2 billion at the end of June 2008.

Exchange Rates

The weighted average nominal exchange rate (taka/dollar) remained stable between Tk68.5-Tk68.8:$1 during the October-December of FY2009, The real effective exchange rate (REER) index appreciated by 3.6% during July-December, FY2009 implying erosion of export competitiveness in the international market.

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.

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