News and Events

News Release

Quarterly Economic Update, Bangladesh December 2003
Bangladesh, Dhaka, 29 January 2004

Highlights

• The economy remains on track for higher output growth in FY2004. A favorable outlook for aman, and a pick up in export-oriented manufacturing activity bode well for higher GDP growth, which is expected to increase to 5.7% this year.
• Notwithstanding a higher trade deficit and moderation in growth of migrant worker remittances, the balance of payments remain healthy and reserves remain at around US$2.5bn as of mid-January 2004.
• The exchange rate remains stable while inflation has edged up. The recent rise in prices is likely to gradually come down as the crop outlook remains favorable.

Economic Growth

The GDP growth rate for FY2004 is expected to rise to 5.7% from 5.3% during FY2003, as domestic and external demand recovers. Private investment in manufacturing is expected to gather pace as there are indications of an upturn in industrial credit and foreign direct investment. In agriculture, we are expecting a bumper aman crop. A global recovery and an increased volume of world trade are expected to accelerate growth of manufacturing exports. Service sector activity, particularly trade, transport, and finance are also likely to pick up with the anticipated recovery in export-oriented manufacturing and food crop production. The country will, however, need to upgrade its infrastructure, including ports and associated road and rail links to fully exploit the economic opportunities offered by a global recovery. There is also a continuing need to improve governance issues including corruption, and law-and-order.

As expected, the aus harvest at 1.83mn tons came in slightly below the aus harvest of the previous year. The outlook for aman, however, remains favorable. The area under aman cultivated exceeded its target by 4.3%, while yields in some parts of the country increased by 5-7% over last year. Year-on-year data for the first four months of FY2004 indicate a moderation in the rate of increase in medium and large scale manufacturing output. However, based on recent data on exports of manufactured goods, imports of industrial raw materials, and industrial credit, there are strong indications of a recovery in manufacturing output. Production of other industrial items such as natural gas and electricity also showed strong growth.

Fiscal and Monetary Developments

Although revenue collection during the first six month of FY2004 increased by 10.2% over the corresponding period of FY2003, it fell marginally short of its half yearly target. In order to achieve the FY2004 annual revenue target, and contain domestic financing of the budget, it would be essential for there to be no let up in overall revenue mobilization, and for a renewed effort in the collection of domestic indirect taxes, which came in slightly below target.

During the first five months of FY2004, broad money (M2) increased by 3.9% compared with a 4.7% growth rate in the corresponding period of FY2003. Notwithstanding a pick up in net foreign assets of the banking system, slower M2 growth during this period was due to a moderation in public sector credit growth. This has been attributed to ongoing downsizing of SOE's, upward revision of utility tariffs and a slower pace of implementation of the Annual Development Program. Private sector credit growth during this period remained broadly stable, reflecting steady growth in domestic economic activity.

Monetary policy, which remained tight in the run up to the floating of the taka at the end of May 2003, has recently been eased as the taka continues to exhibit stability. Reserve money was allowed to increase sharply in November 2003 on account of an increase in excess reserves of deposit money banks with Bangladesh Bank, following a reduction in the Statutory Liquidity Requirements of banks from 20% to 16% in the same month. Interest rates on 28-day treasury bills have also come down to around 4% in January 2004, from 7.8% at the end of May 2003, as Bangladesh Bank intervened with lower volumes of treasury bills in the market. The introduction of regular repo operations has led to an easing of pressure on liquidity in money markets. As a result, call money rates have remained broadly stable at around 5% in recent weeks.

Inflation and Exchange Rates

Inflation continues to edge up. The annual average rate of inflation (base year FY96=100) increased to 5.1% in November 2003 from 4.4% in June 2003. On a point-to-point basis, inflation has picked up to 6.7% from 5% during this same period. As in the recent past, food prices continued to be the main driving force behind higher inflation. The recent rise in prices, which had been expected and could be partly attributed to increased demand pressures on account of the Eid festivities at the end of November, is likely to gradually come down as the crop outlook remains favorable. The exchange rate in the formal inter-bank market continues to remain stable. The differential that had earlier developed between the formal and informal (Curb) rates has now closed.

Balance of Payments

Preliminary data for the first five months of FY2004 indicate that merchandize exports (f.o.b basis) increased by 13.2% over the corresponding period of FY2003. Export growth was broad based, with strong growth evident for knitwear, woven garments, frozen foods and chemical products. Import growth (f.o.b basis) for the first four months of FY2004 increased by 18.6%. Strong import growth was evident for food grain, edible oil, inputs into the garment industry, and capital goods. The increase in imports offset the increase in exports and led to a widening of the trade deficit in the first four months of FY2004. The higher trade deficit was accompanied by a significant moderation in the growth of migrant worker remittances as the number of persons leaving for work abroad barely increased between the two periods. As a result of these developments, the current account of the balance of payments (excluding grants) for the first four months of FY2004 moderated to a surplus of US$321mn from a surplus of US$558mn during the corresponding period of the previous year.

The lower current account surplus was accompanied by higher inflows of medium and long term loans and FDI. As a result, balance of payments recorded a surplus of US$150mn as against a surplus of US$207mn during the corresponding period of FY2003. Reflecting a positive balance, and increased inflows of concessional aid, gross official reserves had increased to US$2461mn (or 12 weeks of imports) as of 18 January 2004.

Consultations with Government agencies are planned from late October to mid November 2003 to coincide with ADB's annual Country Program Confirmation Mission.

More consultations with major NGOs, the private sector, development partners, and academics are expected to be held in Dhaka in the coming months.

The CSP will support implementation of the Government's recently completed National Strategy for Economic Growth, Poverty Reduction, and Social Development.

The CSP is expected to be submitted to ADB's Board of Directors for consideration next year.