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News Release

Quarterly Economic Update, Bangladesh, June 2009
Dhaka, Bangladesh, 15 September 2009

Summary

GDP grew by 5.9% in FY2009, slightly lower than 6.2% in FY2008 because of the moderation in aggregate demand affected by a slowdown in exports and remittance inflows, and also underpinned by private consumption (about 75% of GDP), which rose by 6.0%. Public investment declined further, sliding from 5.0% of GDP to 4.6%, as Annual Development Program (ADP) implementation remained weak. Taking the economy to a higher growth trajectory and more rapid and sustainable poverty reduction will require large-scale infrastructure investment well beyond what the Government can provide. The Government's strategy to address the infrastructure gap includes action on two fronts: building a more conducive environment and enhancing the framework for public-private partnerships (PPPs). Several downside risks to the economy in the near term include a delayed recovery of the global economy, likely shortfalls in revenue collections and mobilization of external financing, and the onset of natural disasters.

Agriculture

The agriculture sector grew by 4.6% in FY2009, up from 3.2% in FY2008, owing to high growth in food-grain production (8.1%) aided by favorable weather and strong government support. Measures to speed up delivery of seeds, fertilizers, power, and credit and scaled up subsidies for fertilizer and power used for irrigation were key factors in boosting sector output.

Industry

Industry sector growth declined to 5.9% in FY2009 from 6.8% in FY2008 as export production in the second half of the fiscal year slowed due to the global slowdown. Weak investor sentiment also affected manufacturing growth, as did slow implementation of power and energy projects, and weak construction activity. Growth in the power and gas subsectors dropped to 4.5% in FY2009 from 6.8% in FY2008, while growth in the construction sector dipped slightly to 5.7%.

Services

The service sector growth also slowed slightly to 6.3% in FY2009, due to the slowdown in remittance inflows, lower trade activities, and moderation in industry growth. Slower export growth and a fall in import volumes affected trade and transport services. Retail and wholesale services were affected by moderating consumer demand.

Inflation

Annual inflation declined to 6.7% in FY2009 from 9.9% in FY2008. The successive cuts in domestic fuel prices in October and December 2008 and January 2009, in line with the fall in international commodity prices and rise in domestic food supplies, has helped to ease price pressures in recent months, particularly of foodstuffs. On a year-on-year basis, inflation fell steadily throughout the fiscal year, reaching 2.3% year-on-year in June 2009, its lowest level since December 2001. The Bangladesh Bank's inflation target of 6.5% in FY2010 appears realistic in view of recent trends.

Fiscal Management

Revenue collection remained unchanged at 11.2% of GDP in FY2009 because of the sharp fall in import growth due to the fall in international fuel and commodity prices, the global economic crisis and slower expansion of economic activity. Revenue from the national Board of Revenue sources increased by 10.7%, far below the budget target 18.6% and the 27.4% growth of the previous fiscal year. On the expenditure side, public spending was lower at 15.3% of GDP, down from 15.9% in FY2008, because of savings on food, fuel, and fertilizer subsidies given the fall in international prices, and ADP underutilization. As savings on public spending was larger than the shortfall in revenue, the fiscal deficit of 4.1% of GDP was lower than the budget target of 5.0%.

Monetary and Financial Sector Developments

Broad money grew by 19.2% year-on-year in June 2009, up from 17.6% in June 2008, a result of monetary easing by the Bangladesh Bank in March 2009 and its large purchase of foreign exchange in the interbank market. Private sector credit growth slowed to 14.6% year-on-year in June 2009, down from 24.9% in June 2008, because of the slower trade growth and slack in investment activities due to the global economic recession. In the latest Monetary Policy Statement (MPS), Bangladesh Bank continues to maintain its accommodative policy for supporting the Government's borrowing needs to finance its countercyclical development program, while ensuring adequate flow of credit to the private sector.

Balance of Payments

Exports grew by only 10.3% in FY2009, a sharp deceleration from the 15.9% in FY2008. Retail sales in developed economies fell, leading to a slowdown in garment export orders and shrinking profit margins for Bangladeshi exporters through price reductions. Imports in FY2009 rose by only 4.1%, mainly due to the sharp fall in imports of food items and capital machinery. As a result, the trade deficit narrowed to $4.7 billion in FY2009, from $5.3 billion in FY2008. Growth of workers' remittances remained robust at 22.4% and pushed the current account surplus of $2.5 billion from $680 million in FY2008. The overall balance of payments surplus ballooned to $2.1 billion in FY2009 from $331 million in FY2008. Gross foreign exchange reserves were $7.5 billion (3.8 months of imports) at end-June 2009, up $1.3 billion during the fiscal year.

Exchange Rates

The weighted average nominal exchange rate (taka/dollar) remained mostly stable in FY2009 with modest depreciation, moving between Tk68.5-Tk69.1 to the US$1, benefiting from the healthy and stable foreign exchange reserve position and high remittance inflows. Bangladesh Bank purchased $1.5 billion from the local inter-bank market in FY2009, which kept the taka from appreciating. Both the nominal and real effective exchange rates appreciated during FY2009, implying some erosion in export competitiveness.

Budget for FY2010

The FY2010 budget strikes a prudent balance between the need to stimulate the economy against the backdrop of the global recession (fiscal deficit is targeted to widen to 5.0% of GDP). It increases spending on social safety net programs to protect the poor, while preserving macroeconomic stability. In view of the widening infrastructure gap, the new budget also unveiled bold initiatives to create a framework for PPP to enhance private investment and streamline project approval processes (among other measures) to accelerate ADP utilization.

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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