Catalog

	Table of Contents
p. 37 of 77 BACK | NEXT Foreword, Acknowledgments, Acronyms and Abbreviations, Definitions I. Developing Asia and the world II. Economic trends and prospects in developing Asia East Asia Southeast Asia South Asia Afghanistan Bangladesh Bhutan India Maldives Nepal Pakistan Sri Lanka Central Asia The Pacific III. Promoting competition for long-term development Statistical appendix

Asian Development Outlook 2005 : II. Economic trends and prospects in developing Asia : South Asia

---

Bangladesh

Despite widespread and destructive flooding, GDP growth in FY2005 is expected to slow only moderately, aided by flood-damage reconstruction efforts and continued expansion in export-oriented industry and services. In the policy field, initiatives are needed to mitigate the adverse impact of the termination of the MFA, including upgrading infrastructure and removing structural impediments.

Macroeconomic assessment of 2004

In FY2004 (ended June 2004), GDP expanded by 5.5%, up slightly from 5.3% a year earlier. The performance was underpinned by improvements in industrial production and services, reflecting a rebound in exports and greater private consumption. Growth in the agriculture sector slowed to 2.7% from 3.1% in FY2003, mainly due to weakness in the crops and horticulture subsector, though the fishing subsector performed well in response to greater external demand for marine fish and frozen shrimps.

Industrial output increased by 7.7% as against 7.3% in FY2003, due to somewhat greater strength in export manufacturing and construction activity. Production of garments, knitwear, pharmaceuticals, ceramics, cement, and food products registered steady upticks. Following a steep rise in international prices of construction materials, the Government provided tax concessions on their import and sale to sustain momentum in construction, where growth accelerated to 8.3%. As in the preceding year, expansion in the power, gas, and water supply subsector remained robust at over 8%. The services sector recorded a broad-based expansion of 5.7%, up from 5.4%.

On an expenditure basis, GDP expansion in FY2004 was driven by a 6.3% gain in consumption. At 23.6% of GDP, investment was marginally higher than the 23.4% of the previous year. Private investment edged up by 0.3 percentage point to 17.5% of GDP, while public investment declined by 0.1 percentage point to 6.1% of GDP, reflecting underperformance in development spending. The national savings rate, at 24.5% of GDP, was unchanged from a year earlier.

According to the preliminary report of the Poverty Monitoring Survey (PMS) of the Bangladesh Bureau of Statistics in December 2004, poverty incidence has further declined. The PMS uses the direct calorie intake and food energy intake methods to measure poverty. Based on the former method, head count poverty retreated from 46.2% in 1999 to 40.9% in 2004; the corresponding estimates under the latter method are 44.7% and 42.1%. Although not directly comparable, the PMS results are broadly in line with the latest household income and expenditure survey of the Bureau, which reported that 50% of the population was below the poverty line in 2000.

In spite of a shortfall in revenues, the budget deficit in FY2004 narrowed to 3.2% of GDP from 3.4%. Revenues remained at a low of 10.2% of GDP, and reflected continued problems in boosting tax collection, despite the various measures that have been taken. Total expenditures declined a little to 13.4% of GDP from 13.7%, reflecting restraint placed on current expenditures and underperformance in development spending. Domestic sources accounted for two thirds (2.1% of GDP) of deficit financing; foreign assistance covered the balance.

Price pressures mounted in FY2004 with CPI inflation climbing to 5.8% from 4.4% in the previous year, due mainly to higher food prices. The food component of the CPI nearly doubled, to 6.9% from 3.5%, while the nonfood component moderated (Figure 2.14). Inflationary pressures were, in good part, due to increased international prices of major commodities. An upward revision in administered prices of some energy products also fed into inflation, although most of the rise in international oil prices was not passed on. The exchange rate was broadly stable against the US dollar in FY2004.

Broad money (M2) growth declined from 15.6% in FY2003 to 13.8% in FY2004, though still somewhat higher than the target of 12.2%. Credit growth to the private sector moved up to 14.2% from 12.7% in FY2003 on account of a pickup in manufacturing and services. Bangladesh Bank made use of newly introduced repo and reverse repo instruments to influence the level of liquidity in the banking system. Interest rates continued to decline in FY2004, aided by lower rates offered on government national savings certificates, a reduction in the statutory liquidity requirement, and improved supervision and corporate governance at commercial banks. The weighted average interest rate on bank credit slipped to 11.0% at end-June 2004 from 12.8% 12 months earlier, while that on bank deposits eased from 6.3% to 5.7%.

Exports increased by 15.9% to $7.5 billion in FY2004, up from 9.5% a year earlier. This better performance was underpinned by greater strength in woven garments, knitwear, frozen shrimps and marine fish, and leather in response to a rise in external demand. Imports rose by 13.0% to $9.8 billion, a rate similar to the previous year. Imports of textiles, industrial raw materials, capital goods, and food products increased sharply. While the trade deficit widened slightly to $2.3 billion, the current account surplus (excluding official transfers) of $115.0 million (0.2% of GDP) was essentially unchanged due to stronger current transfers of workers’ remittances from a year earlier. The overall balance of payments recorded a surplus of $171.0 million, and foreign exchange reserves at end-FY2004 stood at $2.7 billion, equivalent to about 3 months of imports.

Macroeconomic policy developments

Bangladesh’s Interim Poverty Reduction Strategy Paper (I-PRSP) was completed in March 2003. Since then, substantial progress has been achieved in moving from the I-PRSP to a full PRSP, which incorporates prioritized strategies and a medium-term macroeconomic framework for combating poverty. The draft PRSP released in January 2005 centers on eight policy priorities that pursue the goal of accelerated poverty reduction. These include maintaining macroeconomic stability, maximizing pro-poor benefits from the growth process, strengthening the social safety net, advancing human development, assuring participation of poor and disadvantaged groups in the development process and their empowerment, promoting good governance, improving service delivery in the areas of basic needs, and protecting the environment.

The FY2005 budget sets an ambitious revenue target of a 16.7% rise in revenues. The revenue-enhancing measures adopted in the budget include expanding income tax and VAT coverage and rationalizing rates of customs duty, supplementary duty, and income tax. Attaining the revenue target will require an effective revenue mobilization drive and enforcement of greater discipline in tax management, including closer monitoring and supervision of staff. The budget seeks to enhance total spending by 15.6% year on year. The budget prioritizes projects with growth and poverty reduction potential in the infrastructure and social sectors. Fully achieving these development priorities will require improved public expenditure management and stronger institutional capacity for implementing development projects.

The financial sector is overwhelmingly bank-based, with 49 banks accounting for about 95% of the sector’s resources. There has been progress in financial sector reforms, including bringing more discipline to the banking sector, increasing the operational autonomy and regulatory power of the central bank, and improving the governance of public financial institutions.

The Government has secured commitments from the nationalized commercial banks (NCBs) to restrict new lending, reduce NPLs, and rationalize their branch networks. Special audits of the NCBs have been undertaken in accordance with international auditing and accounting standards. The ratio of NPLs to total loans in the banking system was 20.9% in September 2004, having declined from 41.1% in 1999. However, the NCBs were still burdened with a 29.7% NPL ratio in September 2004, due mainly to loans made on noncommercial grounds that date back to the 1970s and 1980s. While local private banks as a group have a healthier financial position than the NCBs, even some of these face difficulties due to large NPL portfolios.

Under IMF’s ongoing Poverty Reduction and Growth Facility, the Government has undertaken major reforms of the NCBs, including defining bank-by-bank resolution strategies. In the interim, it has also taken steps to strengthen bank management and to restrain lending so as to stanch additions to NPLs. The World Bank’s Development Support Credit also supported key banking sector reforms. The implementation of the ongoing reform agenda for the NCBs and their eventual privatization will require strong political support.

Despite recent improvement, the capital market remains underdeveloped, and at end-2004 had a market capitalization of a mere $3.8 billion (6.7% of GDP). The capital market consists primarily of equity issues, while government securities and savings instruments account for almost the entire limited amount of debt securities issued in the country. Moreover, high interest rates offered on long-term government savings instruments have discouraged the development of the equities market and distorted the market for issuing private debt securities. To pave the way for the development of a secondary market in debt securities, the recently introduced government 5- and 10-year bonds were listed for trading on the Dhaka Stock Exchange. Moreover, high interest rates offered on the Government’s 3- and 5-year savings certificates have been trimmed to better align them with market-determined rates.

Partly in response to restructuring of government interest rates, the Dhaka Stock Exchange general index moved up to 1,971.31 by 30 December 2004, for a 104% gain over the year. However, investor confidence in corporate governance of the listed companies and in execution of the rule of law remains low. In addition, the unavailability of issues with strong fundamentals and the absence of sufficient initial public offerings are major problems for sustaining the stock market’s growth.

Although the MFA was phased out with effect from 1 January 2005, exporters are optimistic about continued steady growth of the garment sector in a quota-free world. The garment industry is stressing the need for the creation of a central bonded warehouse, funding facilities for development of an integrated domestic supply chain, and relaxation of the rules of origin to enable it to face the post-MFA challenge of global competition. Many garment entrepreneurs have prepared themselves by consolidating and restructuring their operations to improve competitiveness.

The garment industry is hampered by costly infrastructure bottlenecks. The challenge is now to lower costs and improve infrastructure to meet increasingly stiff competition. Because of poor infrastructure and high import dependence, the purchase order to delivery cycle (or lead time) of the garment industry is 1 month longer than in major competing countries. This problem has become even more critical in the post-MFA era since the industry now needs to compete with much smaller margins. Over the years, the role of FDI in the garment industry has significantly declined as the Government opted to preserve the valuable quotas for the locally owned factories. This has deprived the country of benefits from the inflow of superior technology and management as well as direct market access and links to EU and US buyers.

Outlook for 2005-2007 and medium-term trends

GDP growth in FY2005 is estimated at 5.3%, down slightly from the preceding year, mainly due to the devastating floods of July-September 2004. Affecting about 38% of the country, the floods caused extensive damage to standing crops, infrastructure, and livelihoods of 36 million people across 39 districts. According to a preliminary assessment conducted in September 2004, damage is estimated at about $2.2 billion, comprising $1.3 billion in asset loss and $0.9 billion in output loss. The impact of the flood damage, together with a steeper oil bill, is expected to be largely offset by flood rehabilitation expenditures mainly financed by aid and increased workers’ remittances.

It is estimated that the flooding will bring down agricultural growth in FY2005 to 0.4%, primarily due to its adverse effects on the aman (wet-season rice crop). Industrial growth, however, is likely to be pushed higher, to 7.8%, by export-oriented manufacturing. During the first 4 months of FY2005, manufacturing output, boosted by garment production, rose by 8% over the same period in the previous year. The services sector in FY2005 is likely to show improved growth of 6.0%. Expansion in transport and trade services, an upturn in recruitment in public administration, and higher profitability of private sector banks are expected to lift services.

During FY2005, the fiscal deficit is projected to worsen to 4.7% of GDP, reflecting increasing expenditures in the face of weak revenue performance. In the first half of FY2005, revenues under the National Board of Revenue were only 9% higher than in the same period of the previous year, and well below the 16.7% targeted in the budget. Meanwhile, the Government in December 2004 raised prices of kerosene and diesel by 15% to Tk23 per liter, to reduce the losses of the state-owned Bangladesh Petroleum Corporation and to alleviate pressure on the government budget caused by high international oil prices. Further adjustments will be required, though the current government policy is for partial adjustments spread over time.

Inflation is expected to accelerate to 7.0% in FY2005. Overall inflation, on a 12-month moving average basis, has been on a rising trend and reached 6.1% in December 2004, with the food component at 7.5%. With the setback in rice production, food prices are unlikely to decrease significantly during the rest of the year, raising the overall index. Moreover, the December upward adjustment in petroleum prices has not been fully passed through.

Exports are estimated to grow by 15.0% in FY2005, reflecting a steady uptrend in garment exports. During the first half of the year, exports recorded a 15.2% gain over the same period of FY2004 with an especially strong performance in knitwear (up by about 38%). Imports are also projected to pick up in FY2005, by 20.0%, due to increases in industrial raw materials, capital goods, and oil.

During the first 5 months of the year, imports jumped by 22.8%. According to estimates of the central bank, the balance-of-payments impact of higher oil prices is in the order of $300 million-400 million, on an assumed oil price of $40-45 per barrel. A mitigating factor in the energy outlook is that locally produced natural gas is being substituted for petroleum products, particularly in the transport sector. Despite an increase in workers’ remittances, a widening trade deficit is expected to push the current account (excluding official transfers) into a deficit of about $600 million (1.0% of GDP) during FY2005. Additional foreign assistance has been available in FY2005 and foreign exchange reserves rose (by about $300 million) to $3.0 billion at end-January 2005.

GDP growth is expected to strengthen to 6.0% in FY2006-FY2007, with budget and external deficits remaining within manageable levels. The improvement will reflect a recovery in agricultural output to 3.0%, as well as steady performance in industry and services. Investment is projected to rise to 26.0% of GDP in FY2007, propelled by an acceleration in private investment induced by ongoing reforms.

Inflation will likely moderate to 5.0% by FY2007 as crop production returns to normal levels and as the Government continues its policy of gradually reducing petroleum subsidies. The budget deficit is forecast to decline to 4.5% of GDP by FY2007 with revenues and expenditures both growing each year, by 0.5% and by 0.4% of GDP, respectively.

Growth in exports is expected to fall to 8.0% by FY2007 as more intense global competition limits expansion in garment exports. However, the current account deficit (excluding official transfers) is forecast to remain modest at 1.0-1.5% of GDP, aided by the steady growth in remittances from workers abroad.

These forecasts face several downside risks over the medium term, including an even greater adverse impact from the phaseout of MFA quotas, an unforeseen and abrupt increase in oil prices, and the possible intensification of the country’s confrontational politics, which could trigger an upsurge in general strikes and lawlessness. The Government needs to address crucial policy and institutional issues to temper some of these risks.

In line with its medium-term macroeconomic framework, macroeconomic stability needs to be maintained and the necessary structural reforms implemented. In particular, the Government will have to focus on augmenting domestic resources while rationalizing expenditures. Raising private investment levels will require major efforts to improve the investment climate, including improving governance and stepping up reforms to improve the efficiency of the banking system and capital market.

In addition, the authorities should undertake policy initiatives to mitigate the impact on the balance of payments of the elimination of MFA quotas. These include efforts to promote diversification of the export base and enhancement of competitiveness so as to encourage FDI (especially in the garment industry) and to remove structural impediments. To realize the potential for anticipated higher export-led growth, the ports, roads, railways, and waterways, as well as energy provision and ICT, all require significant infrastructure improvements.

Back Afghanistan	Next Bhutan