News and Events

News Release

Quarterly Economic Update, Bangladesh, March 2004
Dhaka, Bangladesh, 2 May 2004

Overview

Overall economic performance points to an improvement in FY2004 with the possibility of higher GDP growth. Improved economic performance is underpinned by strong food crop harvests, export-oriented manufacturing expansion and steady growth in service sector. Rising trend in inflation has been contained. The balance of payments has further improved, due largely to a strong remittance growth and a resulting higher current account surplus. This has resulted in a further build-up in the foreign exchange reserves. Despite a shortfall in revenue collections, budget deficit is likely to be lower than projected, because of underperformance in development spending.

Agriculture

The agriculture sector during FY2004 is likely to show firmer growth with strong indications of good harvests of summer and winter food crops. During FY2004, food grain production is estimated at 27.2 million tons compared with 26.7 million tons in the preceding year. While aus output was slightly lower than last year, aman production - the second major crop of the year was exceptionally good with 3.6% growth relative to last year. The aman output was around 11.5 million tons compared with 11.1 million tons during FY2003. Although excessive rainfall and floods adversely affected aman plantation in some parts of the country, timely rainfall in most places favored better yields. The boro plantation was initially affected in many parts of the country due to inferior seeds, fertilizer crisis, and inadequate irrigation. Despite these impediments, boro production is estimated to be over 12.4 million tons from 12.2 million tons in the preceding year due to an increase in acreage. Wheat production is, however, likely to suffer a setback due to unusually lengthy dry spell. Production of vegetables, potato and tea is likely to improve.

Industry

The manufacturing sector sharply rebounded as indicated by the turnaround in manufacturing exports, imports of industrial raw materials, and expansion of industrial credit. Based on the quantum index of small-scale manufacturing industries compiled by the Bangladesh Bureau of Statistics (BBS), the output of small-scale industry has performed relatively well, with output increasing by 5.4% during the first half of FY2004. Manufacturing recovery is, however, not reflected in the quantum index of large and medium scale industrial products. This index for the first seven months of FY2004 shows only 2.1% growth over the same period of the previous year. The quantum index of large and medium scale industrial products would need revision because of its limited coverage and outdated weights for various sub-sectors. Production of non-manufacturing items steadily increased with natural gas and electricity showing about 10% growth during the first four months of FY2004 relative to the same period of FY2003.

Economic Growth

The overall economic performance seems to be on track to achieve the targeted 5.5% GDP growth rate for FY2004 as against the 5.3% growth rate achieved in FY2003. The growth performance is lifted by expansion in both domestic and external demand. There is a turnaround in investment, particularly in private investment. The pick-up in industrial country demand is likely to be sustained to accelerate growth of manufacturing exports. In agriculture, there has been a bumper aman harvest and a good boro crop is expected. Higher agriculture and export-oriented manufacturing activities are also expected to improve service sector activities, including trade, transport and finance sub-sectors.

Bangladesh, however, continues to perform below its potentials. The country would need to upgrade its infrastructure, including ports with requisite road and rail links to seize its full economic potentials, particularly of export-led manufacturing expansion. There is also a pressing need to address governance issues including reducing corruption, and reversing law-and-order slides.

Fiscal Management

Revenue collection during the first nine months of FY2004 increased by 9.2% over the same period of FY2003, but was short of target by 3.1% for the period. During the first quarter of 2004, the monthly revenue target for January was achieved; but collections in February and March were significantly below targets. It was observed that hartals have had some negative impact on revenue collection. Despite the shortfall in revenue collection, the budget deficit in FY2004 is expected to be lower than the targeted 4.8% of GDP, principally on account of the shortfalls in implementation of the Annual Development Program. Bangladesh, with a low revenue-GDP ratio of 10.4%, which is low by regional standards, needs to substantially improve its revenue collection by implementing coordinated systemic, procedural and administrative reforms of both direct and indirect taxes. Raising both the revenue and the expenditure levels while maintaining fiscal prudence is central to accelerating economic growth and achieving rapid poverty reduction in Bangladesh.

Monetary Developments

Broad money (M2) increased by 6.6% in the first eight months of FY2004, compared with a 9.2% growth during the same period of FY2003. The higher growth in net foreign assets of the banking system compared with the corresponding period of the previous year was more than offset by the slower growth in the net domestic assets of the banking system. Credit to the public sector during July-February FY2004 increased by only 1.5% compared with a 2.5% growth in July-February FY2003. Net credit to the Government during July-February FY2004, declined by 1.7%, meaning that Government possibly repaid more money than it borrowed from the banking system. Credit flow to the private sector continues to be robust, with a growth of 12.4% in the 12 months ending February 2004.

Balance of Payments

Aided by robust global demand, the export sector recovered sharply with strong growth, particularly in garments and knitwear. During the first eight months of FY2004, exports amounted to $4,793 million, implying a 13.9% growth over the corresponding period of FY2003. Imports have also been showing robust growth for the first seven months of FY2004, increasing by 16.6% as against same period of FY2003. Based on data for the first half of FY2004, there have been sizable increases in the import of food grain (rice and wheat), sugar, edible oil, oil seeds, industrial raw materials, and petroleum. The opening of letters of credit (LCs) during July-February of FY2004 registered a 17.8% growth over the same period of the previous year, signaling strong import performance in the following months. Despite a widening of the trade deficit during the first seven months of FY2004, the current account of the balance of payments (excluding grants) generated higher surplus, mainly due to steady increase in overseas workers remittances and lower deficit in the services account. This aided continued improvement in the balance of payments, resulting in a further build-up in foreign exchange reserves. Gross official reserves increased to US$2,593 million (or 3 months of imports) at the end of January 2004 from US$1,613 million (2.2 months of imports) at the end of January 2003. External reserves as of 20 April 2004 further increased to US$2,722 million or about 3 months' equivalent of imports.

Inflation and Exchange Rates

The rising trend in inflation has been contained. On a point-to-point basis, inflation increased to 6.7% in November 2003 from 5.1% in July 2003, mainly due to a rise in food prices. Thereafter, inflation declined steadily to 6.5% in December 2003, 6.0% in January 2004 and 5.8% in February 2004 with declining trends in food prices. The higher price, to some extent, is not domestically induced. Rather it is attributed to an increase in international prices, particularly of several food items. While Taka-US$ rate remained stable, based on Bangladesh Bank's analysis, in real effective terms, the exchange rate experienced some depreciation reflecting the decline in the value of the dollar against major currencies. In early December 2003, all margin requirements on the opening of LCs were phased out, thereby further liberalizing the exchange market.

ADB 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 63 members - 45 from the region. In 2003, it approved loans and technical assistance amounting to US$6.1 billion and US$177 million, respectively.