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News Release

Quarterly Economic Update, Bangladesh, March 2009
Dhaka, Bangladesh
(Released on 4 June 2009)

Summary

The Bangladesh economy has avoided the first round impacts of the global financial crisis due to the low integration of the country's financial sector with the global markets. With the financial crisis worsening into a global recession, the real economy has begun to be affected. Exports and remittance growth have both moderated, slowing gross domestic product (GDP) growth in the near term. The Bangladesh Bureau of Statistics (BBS) now estimates that GDP growth in FY2009 will fall slightly to 5.9% from 6.2% in FY2008.

Although the agriculture sector — underpinned by favorable weather conditions and the Government's strong policy support — is poised for robust growth in FY2009, growth rates in the industry and service sectors are likely to slow, mainly as a result of weaker demand. With ready made garments (RMG) and knitwear together accounting for 40% of industrial value added, the slowdown in RMG and knitwear exports will affect growth in the industry sector. The services sector is set to moderate due to the pullback in industrial activity and trade, along with weaker private consumption caused by the slowdown in growth remittance inflows.

The country's macroeconomic management remains prudent in the midst of the global slowdown. The Government on 19 April 2009 announced a Tk34.2 billion stimulus package to boost domestic production and raise business confidence. Continued prudence is vital to help limit the effects of the economic slowdown. At the same time, public investment in infrastructure needs to be raised and targeted safety net programs implemented. Reforms need to continue to augment economic competitiveness and improve the investment climate.

Agriculture

The new Government has attached top priority to developing agriculture to enhance food security and support pro-poor growth. According to BBS estimates, agriculture growth will rise to 4.6% in FY2009, up from 3.2% in FY2008. Actual production of rice and wheat may come close to the target despite insufficient rains in February and March, 2009. The prospects for the boro (dry season crop) remain favorable.

The Government has taken timely measures to supply agricultural inputs to farmers. In January 2009, the Government cut non-urea fertilizer prices by almost 50%, reduced prices of diesel and kerosene by Tk2 per liter, supplied more electricity to rural areas for irrigation, and improved the fertilizer delivery system. The Government also took measures to provide credit to farmers and expedite delivery of extension services.

Industry

The effects of the global slowdown have begun to be felt by the country's industry sector. Growth in RMG and knitwear production has started to slow while serious power shortages at the onset of the dry season dampened sector growth prospects. The gains in business confidence stemming from a peaceful political transition have been partly offset by the negative impacts of the global economic slowdown. BBS estimates that industry sector growth will fall to 5.9% in FY2009 from 6.8% in FY2008.

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

After robust performance during the first two quarters of the current fiscal year, the services sector is also coming under pressure from the global slowdown. Slower export and import growth has affected transport and communications. The slowdown in industrial activity has also dampened service sector growth. As a result, BBS estimates service sector growth of 6.3% in FY2009 compared with 6.5% the previous year.

Inflation

Despite Bangladesh Bank's (BB) accommodative monetary policy, inflation has fallen steadily during FY2009, reaching 5.4% year-on-year in April 2009 from 10.8% in July 2008. This deceleration is due to the sharp decline in international oil and food grain prices, along with improvements in domestic food supply. The decline in food price inflation to 4.8% in April 2009 from 13.9% in July 2008 is the main contributor to the decline in overall inflation. The nonfood price index increased to 6.5% in April 2009 from 5.9% in July 2008.

Fiscal Management

Government revenue has slowed significantly since the onset of the global financial crisis. Year-on-year revenue growth decelerated from 20.5% in the first quarter of FY2009 to 12.2% in the first nine months of FY2009. As a result, the total revenue target (Tk. 545 billion or a growth of 14.9%) for FY2009 is unlikely to be met. The sharp fall in import prices has markedly affected the collection of import-based taxes, which account for over 40% of all tax collections. Revenue growth from import-based taxes fell from 27.7% in the first quarter of FY2009 to 8.4% for the first nine months of FY2009.

Given the pressures of the global economic crisis, it is essential for Bangladesh to boost aggregate demand and speed up ADP implementation. In particular, ADP projects should be reprioritized with added emphasis given to those that enhance long-term growth prospects. Projects with higher linkage effects should also receive priority. Bangladesh can improve ADP utilization by addressing capacity constraints and improving institutional coordination amongst the concerned agencies.

Monetary and Financial Sector Developments

Broad money growth remains high supported by BB’s accommodative monetary policy, although the growth rate has fallen below levels reached prior to the policy tightening undertaken in 2008 (the repo and reverse repo rates were raised by 25 basis points in September 2008 and November 2008, respectively). Broad money grew 19.8% year-on-year in March 2009, below the September 2008 rate of 23.5%, but above the 15.5% growth posted in March 2008. Private sector credit growth meanwhile reached 18.2% in March 2009, down from growth of 21.2% in March 2008.

The continued monetary expansion was mainly driven by strong growth in public sector credit (20.5%). On the other hand, the pullback in private sector credit growth reflected the slowdown in economic activity, particularly the easing of imports due to the global economic recession.

Balance of Payments

Growth in export earnings has been decelerating steadily, falling from 42.4% in the first quarter of FY2009, to 19.4% in the first half, and just 14.5% for the first nine months of the fiscal year. Growth in the overall export volume index fell to 14.3% in March 2009 from 15.4% in December 2008 and 34.7% in September 2008. Import payments during the first nine months of FY2009 rose by 12.4% year-on-year, well below the 23.9% in the same period of the previous year.

The overall trade deficit widened slightly to $4.0 billion in the first nine months of FY2009 from $3.8 billion in the corresponding year earlier period. Despite the higher trade deficit, because of the 24.5% growth in remittances in the first nine months of FY2009, the current account surplus widened to $1.1 billion from $675 million from the same period in FY2008. As a result, the overall balance of payments posted a surplus of $942 million for the first nine months of FY2009, against a surplus of only $417 million in the previous year.

Exchange Rates

The weighted average nominal exchange rate (taka/dollar) remained mostly stable, moving between Tk68.9–Tk69.0 to US$1 over the third quarter of FY2009. This reflected the country’s healthy and growing foreign reserve position. Both the nominal effective exchange rate and real effective exchange rate indexes appreciated, by 9.9% and 9.7% respectively, during July-March of FY2009, implying a modest erosion in export competitiveness.

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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