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News Release

Quarterly Economic Update, Bangladesh, June 2006

Dhaka, Bangladesh, 31 July 2006

Summary
Despite mounting pressures, overall macroeconomic performance remains positive. Economic growth steadily improved with a steady uptrend in exports and workers’ remittances. However, inflationary pressure further heightened. Underpricing of energy products poses considerable risks to the economy in the period ahead.

Agriculture
During FY2006, the agriculture sector rebounded sharply following the flood-induced setback of FY2005. Agriculture growth is estimated at 4.5% compared with only 2.2% in the previous year, reflecting strong performance of crops, horticulture, and fisheries. Estimated at 27.3 million tons, food-grain production is 4.4% higher than in FY2005, implying an increase in yield rates.

Industry
Driven by robust manufacturing performance, overall growth in the industry sector during FY2006 is estimated at 9.6%, higher than 8.3% in FY2005. Growth in manufacturing was largely lifted by a steady increase in external demand. The strong expansion of the construction, electricity and gas reflected strong consumer and industrial demand. Although growth in manufacturing was encouraging, infrastructure constraints deterred new investments and held back growth potential. Frequent power disruptions and low gas supply pressures had an effect across the country. Bangladesh faces a huge task in meeting higher level of energy demand; substantial domestic and foreign investment will be required.

Services
Expansion of the services sector was strong and sustained in line with rapid growth in agriculture and industry. Growth in the sector in FY2006 is estimated at 6.5%, up from 6.4% in FY2005. Trade, transport, telecommunications, real estate, and community and social services increased substantially.

Economic Growth
GDP growth is estimated at 6.7% in FY2006, higher than the 6.0% in FY2005. Growth performance was underpinned by the rebound in agriculture and steady expansion in manufacturing, aided by continued buoyancy in services. Private consumption was the main driver of growth, bolstered by strong remittance inflows, while investment also maintained an uptrend. Bangladesh faces several near- to medium-term downside risks. These include (i) the ability to sustain growth in the thriving garment sector; (ii) infrastructure constraints, including the power shortage; (iii) underpricing of energy products; and (iv) political uncertainty in the lead up to the general elections scheduled for early 2007.

Fiscal Management
In FY2006, prudent fiscal management kept the fiscal deficit (3.9% of GDP) and domestic borrowing (2% of GDP) to sustainable levels while revenue increased modestly to 10.8% of GDP. However, ADP implementation was slow. FY2007 budget plans to keep budget deficit to 3.7% of GDP and domestic borrowing to 1.9% of GDP with an ambitious ADP. The continued huge implicit subsidy on petroleum products poses risks to fiscal management in the period ahead.

Even after last price adjustment in June 2006, annual implicit subsidy for diesel and kerosene remains high and is estimated at $810 million or 1.3% of GDP. A more appropriate energy pricing policy will free up government resources for infrastructure development and enhance social safety nets for the poorer segment of the population.

Monetary Developments
Despite the tightened monetary policy stance, both money and credit growth rates continue to be high. On a year-on-year basis, broad money increased by 20.5% in May 2006 compared with 16.3% in May 2005; domestic credit increased by 21.6% in May 2006 compared with 18.3% in May 2005. While growth of credit to the private sector moderated somewhat, credit to the public sector continued to grow rapidly mainly due to the huge debt of Bangladesh Petroleum Corporation (BPC) to the nationalized commercial banks (NCBs). Meanwhile, the gross nonperforming loans of banks increased, mainly because of huge overdue loans of BPC to the NCBs. For greater effectiveness of monetary policy, increased coordination between monetary and fiscal policies will be needed.

Balance of Payments
Exports registered strong performance with 21% growth in 11 months of FY2006 – a tribute to the surge in garments export. Import growth decelerated to 11% during the same period. A decline in trade deficit with a robust growth in workers’ remittances (25%) generated a surplus in the current account from a deficit in the corresponding period of preceding year. Despite a deficit in financial account, overall balance of payments show a modest surplus. Foreign exchange reserves stand at $3,484 million as of 30 June 2006, increasing by $554 million from the end of June 2005.

Inflation and Exchange Rate
On a point-to-point basis, inflation increased to 7.6% in May 2006, from 6.6% in January 2006. Rapid growth in money supply and the rising import prices amplified by a steady depreciation of Taka (8.4% in FY2006) heightened the price pressures. Pressures on the exchange rate moderated in the last quarter of FY2006 due mainly to the leveling off of import demand as the restraint on private sector credit growth due to the tighter monetary policy began to have some effect. With the trade deficit likely to narrow unless oil import bills increase sharply, depreciation of the taka is likely to moderate in the coming months.

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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 66 members – 47 from the region. In 2005, it approved loans and grants for projects totaling $6.95 billion, and technical assistance amounting to $198.8 million.

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