News and Events

News Release

Quarterly Economic Update, Bangladesh - December 2002

Introduction

Toru Shibuichi, Country Director (center) responds to a question by the media. Purnima Rajapakse, Senior Economist (extreme left), presented the salient points of the QEU at the launching of the publication. Seated second from left is R.K. Khan, Economist

The economy appears to be recovering from last year's lower level of activity. Although the aman crop may be somewhat affected by adverse weather, manufacturing output has picked-up strongly. Revenue collection during the first six months of the year has exceeded its target. A pick-up in exports, a contraction in imports and continued strong growth in worker remittances have led to a balance of payments surplus. However, external reserves have leveled off in recent months and the investment climate remains weak. Although inflation moderated slightly in November 2002, it is likely to pick up in the coming months.

Economic Growth

While the aus harvest is likely to reach its target, there could be some setback to the aman crop due to adverse weather. However, any setback to the aman crop is not expected to be significant. Higher current prices may also act as an incentive for the boro crop in the face of a likely increase in irrigation cost due to the recent hike in fuel prices. As a result, the area under boro cultivation could increase this season, and agriculture growth is likely to be close to 3% this year, compared with negative growth last year.

During the first quarter of FY2003, year-on-year manufacturing output increased by 5.2% relative to negative growth during the same period of FY2002. The growth in output was as high as 8.7% in September 2002 as against September 2001. The increase in output was broad based covering most sectors, namely, textiles, chemicals, food products, non-metallic products, and wood products including furniture. The garments industry has largely recovered from the setback of the preceding year with export volumes of garments and knitwear picking up rapidly. For Bangladesh to take full advantage of relatively strong demand for its main export in the highly competitive EU and US markets, the Government will need to deal with growing infrastructure constraints, improve private sector's access to credit and address governance problems. There are indications of recovery in other industrial sub-sectors as well. Electricity output increased by 6.7% during the first quarter of FY 2003 compared with negative growth during the same period of FY2002.

Due to steady growth in agriculture and a recovery in exports, GDP growth for FY2003 is likely to pick-up to 5.2% from 4.4% in FY2002. The recovery in the agriculture sector will crucially depend on weather conditions and timely input supplies to the farmers. The industrial sector is likely to maintain stronger performance provided the recovery in external demand is sustained and the Government addresses domestic constraints. Service sector activities, particularly in trade, transport and finance are likely to maintain steady improvement with the expected rebounding in agriculture production and export-oriented manufacturing.

Fiscal Management

Revenue collection during the first half of FY2003 recorded an increase of 22.4% over the corresponding period of FY2002 and exceeded the target set for the period by 1.8%. While import based taxes and domestic indirect taxes recorded increases of 23.8% and 24.8%, and exceeded their respective targets by 3.5% and 6.3%, income taxes fell short of its target by 8.8%. The latter nevertheless represented an increase of 13.8% over the same period of FY2002. In the face of stagnancy in imports and a moderate pick up in domestic economic activity, the surge in revenue collection since September 2002 has raised optimism that the ambitious target for revenue collection in FY2003 could be exceeded. Continued administrative initiatives, underpinned by close monitoring and strong enforcement, would nevertheless be needed to consolidate the momentum, and achieve the desired increase in revenue for the year.

Monetary Management

Credit growth has continued to decelerate into FY2003, with year-on-year credit growth moderating to 11.7% in November 2002 from 18.6% in November 2001. This was mainly due to sharp slowdown in credit growth to the public sector reflecting a lower budgetary financing requirement of the central government and the imposition of financial discipline on state-owned enterprises. Private sector credit growth also moderated during this period reflecting moderate domestic economic activity and a more cautious loan approval process adopted by commercial banks. However, net foreign assets of the banking system continue to exhibit a sharply increasing trend due mainly to robust growth in migrant worker remittances. As a result of these developments, broad money growth for the year ending November 2002 moderated to 14.9% from 15.5% in November 2001.

During this period, greater efforts were made to use market-based instruments to manage liquidity and bring about a more realistic structure of interest rates. Towards this end, Bangladesh Bank increased its sales of treasury bills in the second quarter of FY2003. Available data suggest that this has led to a decline in excess liquidity of commercial banks and an increase in the 28-day Treasury Bill (T-bill) rate to 8% at the beginning of January 2003, from 6.39% at the end of September 2002. Reflecting the rise in T-bill rates, call rates have also gradually eased up during this period. After a brief spike at the end of the Eid holidays when call rates increased to 16% following increased demand for cash as business activity returned to normal, call rates have since stabilized at a range of 6.00/6.25 - 7.00/7.50% in recent weeks.

Inflation

Inflation, on a point-to-point basis has decreased marginally from a yearly high of 4.7% in September 2002, to 4.6% in November as the food price index moderated to 3.4% from 3.8% during this period. Although rice prices remained at a relatively high but stable level, the prices of vegetables came down due to the increased availability of the winter crop. Prices of non-food items have, however, continued to edge up to 6.8% in November from 6.4% in September due to higher utility prices. Non-food inflation is set to pick-up in the coming months following the recently announced fuel price hike of 13.75%, and a 5% increase in water charges.

Balance of Payments

Preliminary export data for the first five months of F2003 indicate that merchandize exports (f.o.b. basis) at US$2627mn increased by 6.8% over the corresponding period of FY2002. Large increases were recorded for exports of jute and jute goods, agriculture products (mainly fruits and vegetables), frozen foods, and knitwear and hosiery products. This was, however, partially offset by continuing declines for tea, leather goods and readymade garments. Notwithstanding volume increases, low unit prices and hence lower values for Bangladesh's garment exports would signify the extent of competition facing this segment of industry. Imports (f.o.b. basis) continue to show no clear sign of recovery with year-on-year imports declining 7.0% during the first four months of the year. Although large increases were evident during the first three months of the year for rice imports (perhaps reflecting a somewhat subdued domestic aman crop), this was more than offset by large decreases in imports of crude petroleum, textiles and articles thereof, and capital goods. While the decline in textile imports does not auger well for garment exports, the decline in capital goods reflects continued uncertainty on the part of the private sector over domestic economic prospects.

As a result of these developments on the trade front, and continued strong growth in worker remittances, the surplus in the current account of the balance of payments (excluding official grants) for July-October 2002 increased to US$562mn from US$13mn during July-October 2001. The substantially improved current account more than offset a considerably weaker capital and financial account (due to lower inflows of foreign investment, medium and long term loans, and a higher incidence of debt repayments) and led to an overall balance of payments surplus of US$229mn as against a deficit of US$182mn for the corresponding period of FY2002.

Notwithstanding the balance of payments surplus, external reserves have remained within a range of $1.5-1.8bn since June 2002. At the end of December 2002 external reserves stood at US$1.72bn but came down to US$1.57bn in mid-January 2003 as Bangladesh Bank made a further payment of US$193mn to the Asian Clearing Union. In order to contain imports and alleviate pressure on external reserves, the Government imposed regulatory duties and a 100% L/C margin on certain luxury goods and essential items. While this may contain imports, the current subdued import performance is unsustainable if the country wants to achieve faster economic growth.