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Recent economic developments of Bangladesh
World Bank

          ECONOMIC growth of Bangladesh growth remains robust. Its economy grew in FY05 at a decent 5.4 per cent, compared with 5.8 per cent growth in FY04 and 5.3 per cent in FY03. Growth was upheld in spite of several challenges over the past year including: the devastating floods in July-September 04, a sharp and sustained increase in international oil and commodity prices, the MFA-Phase out at the end of 2004, and an increasingly difficult political climate. There was a steady expansion in manufacturing, construction, and the services sector, which offset a weak performance in the agricultural sector.
On an expenditure basis, GDP expansion in FY2005 was driven by a strong growth in private consumption, exports and worker's remittances, the government's flood rehabilitation measures, including credit expansion to agriculture and industry, and an increase in private investment, including foreign direct investments. Private investment has increased from 17.8 per cent of GDP in FY04 to 18.5 per cent in FY05, while the domestic saving rate increased from 19.5 per cent of GDP in FY04 to 20.2 per cent in FY05. The rise in investment and saving rates are both positive factors for supporting future growth.
Bangladesh faces several challenges for sustaining high rates of economic growth in both the short and medium term including galloping global oil prices, uncertain consequences of the Multi-Fibre Arrangement (MFA) phase-out on the export competitiveness of the garment industry, political uncertainty in the run-up to the next elections due by January 2007, and weak governance.
Surging global petroleum prices in international markets pose major risks to Bangladesh's growth, macro-economic stability and external balances. High global petroleum prices are contributing to inflationary pressures, affect adversely the balance of payments and add to public borrowing to cover the losses from the Bangladesh Petroleum Corporation (BPC).
During the last 12 months, domestic petroleum prices have risen only 30% compared with 86% for the price of international crude oil, with BPC losses likely to reach Tk 30 billion (455 million US dollars) again in FY06 (0.7 per cent of GDP). Insufficient petroleum price adjustments are a major source of macroeconomic risk and have precluded giving a clear price signal to investors and energy users to improve resource allocation in this key sector. Continued price discrepancies will mean either further debt financing and/or expenditure cut backs with serious adverse implications for growth, inflation and poverty reduction. Moreover, if high world prices slow global economic growth, this could in turn depress demand for Bangladesh exports.
There remains some uncertainty regarding the impact of the Multi Fibre Agreement (MFA) phase-out on the country's garment exports. In the first few months since the MFA phase-out on January 01, 2005, exports of woven garments to the US grew rapidly up 21.5 per cent during the first half of 2005 relative to the corresponding period for the previous year. However, exports to other markets, particularly the European Union (EU), have performed less well. Although the export of knitwear has remained robust, the export of woven garments has slowed down considerably.
The prices of some products have also dropped significantly as suppliers have come under pressure to become more competitive. Nevertheless, the restraints imposed on exports from China are likely to benefit Bangladesh in certain goods and markets, providing Bangladesh can overcome some of its current weaknesses. In order to profit, Bangladesh will need to address three key issues: its price competitiveness, lead time, and social compliance. First, Bangladesh's competitiveness has been hampered by the Government polices aimed at preserving export quotas for locally owned factories, which hampers the transmission of better technology and direct access to EU and US markets. Second, lead-time has become a critical determinant of competitiveness in a post-MFA world, yet Bangladesh manufacturers still has one of the longest lead-times amongst competing countries (over one month longer than major competitors) due to poor infrastructure and limited availability of local fabrics. Third, the garment industry has come under mounting foreign pressure to comply with international social standards following a series of recent incidents.
Private sector development remains the engine of growth. If Bangladesh is to finally realise its higher growth potential it will need to overcome some major bottlenecks. This will necessitate improving infrastructure (power, ports and roads), developing technology and basic skills, enabling public-private partnerships, supporting a vibrant SME sector, streamlining policies and bureaucratic red-tape and improving governance (particularly law and order and corruption). Bangladesh's challenges to stimulate greater growth and export competitiveness in a post-MFA world will be explored in greater detail in the final chapter.
Fiscal management continues to be prudent. As in the previous two years, the overall fiscal stance has continued to be prudent. The overall budget deficit is estimated at 3.5 per cent of GDP, compared with 3.2 per cent in FY04 and 3.4 per cent in FY03. This year's slightly larger deficit partly reflects the Government's flood relief efforts and slippages in revenue mobilisation.
Revenue collection yielded a lower outturn for FY05 than initially projected. Although revenue collection from tax and non-tax revenues increased by 12.8 per cent in FY05 (compared to 9.0 per cent in FY04), it still fell short of the PGRF target of 0.2 percentage point of GDP, reflecting delays in the implementation of tax administration reforms at the National Board of Revenue (NBR) and lingering weaknesses in audit and collection enforcement.
Total public expenditure was 2.8% lower than the original target. Current expenditure was slightly above the budgeted level (by 3.5%) due to flood related expenditures. In contrast, the Annual Development Programme (ADP) was lower by 6.8% due to slow project implementation and disbursement.
The structure of deficit financing remains sound. The more expensive domestic financing remains capped at 2.0 per cent of GDP, with the rest coming from concessional foreign financing, including grants. The size of the quasi-fiscal deficit does remain, however, an area of concern.
Rising oil import costs resulted in an increase in BPC losses from Tk 10 billion in FY04 by Tk 28 billion in FY 05 (or 150 million to 425 million US dollars), equal to 0.7 of GDP. Although external debt is relatively low -- at about 33 per cent of GDP and that too mostly on concessional terms -- because export levels are even more modest, the country faces some medium-term liquidity risks: the net present value of future debt servicing obligations in relation to current exports ratio is large.
The FY06 Budget: The FY06 budget, which became effective on July 1, 2005, reaffirms the Government's commitment to support the PRSP and economic growth. In order to harness the country's productive potential, the budget focuses on the following building blocks: investments in social and physical infrastructure, private sector development and NGO partnerships, streamlined tax instruments and administration, employment generation for farm and non-farm sectors and SMEs, and social safety nets and targeted poverty reduction programs.
Total public expenditure is expected to rise to 15.3 per cent of GDP in FY06, principally reflecting an increase in the ADP. The budget corresponds to the first year of PRSP implementation. The budget seeks to operationalise strategic elements of the PRSP including broad-based participation, good governance, improved service delivery. Key indicators for revenue and expenditure are broadly in line with the targets set out in the Medium Term Macroeconomic Framework.
Total revenue collection is expected to increase by over 20 per cent from the simplification of tax collection procedures, expanded tax coverage and efforts to enhance tax compliance. Specific measures have included increases in corporate tax for non-listed companies, taxes on apartment and brickfield, SIM cards and brining some export sectors into the tax net. These measures alone are unlikely, however, to be sufficient to secure the 20.1 per cent revenue growth (over FY05 collections) projected for FY06, since many existing tax holidays and exemptions have been retained. NBR tax revenue collection in the first quarter of FY05 was only 14.8 per cent higher relative to collections in the first quarter of FY04. Considering the likelihood of revenue shortfall, the government has initiated several austerity measures.
FY06 budget endeavours to contain the fiscal deficit. The overall deficit has been set at 4.4 per cent, the primary deficit at 2.8 per cent, with domestic financing remaining nearly unchanged at 2.0 per cent. The mobilisation of sufficient concessional external financing will be critical for the sustainability of the projected deficit.
Monetary expansion is consistent with growth and inflation targets thus far. Monetary policy has broadly supported growth and has remained reasonably successful in containing inflation and managing exchange market transactions. Bangladesh Bank allowed interest rates to ease during 2004 to support credit growth to the private sector, in light of ample liquidity and a reduction in administered interest rates, e.g. on National Savings Certificates. However, the latter part of FY05 was a testing period for Bangladesh Bank partly due to pressures on the balance of payments and increases in inflation. The authorities will need to be vigilant and ready to counter any undue pressures promptly through action on interest rates and exchange rate flexibility, especially in the absence of a significant foreign exchange reserve cushion.
Overall, monetary growth in FY05 increased to 16.9 per cent, compared with 13.7 per cent in FY04. Domestic credit growth in FY05 increased to 17.3 per cent, compared with 14.4 percent in FY04.
The rise in domestic credit reflects 18.8 per cent increase in credit to the public sector, compared with 15.3 per cent in FY04. Credit to both the central government and SOEs increased significantly. Private demand for credit was also strong due to a pick up in domestic manufacturing and service sector activities.
Private sector credit growth increased to 17 percent in FY05, compared with 14.2 per cent in FY04. Trade and working capital finance to the private sector increased by 16.6 per cent and 36.2 per cent respectively in FY05. The stock of outstanding term loans extended by banks and NBFIs increased by nearly 10 per cent, reflecting rapid expansion of private investment demand, esp. in textiles and RMG, cement, pharmaceuticals, telecommunication and medical services. The monetary expansion was underpinned by sharp increase in reserve money growth from 8.0 per cent in FY04 to 14.2 per cent in FY05 due to increase in net credit to the government from Bangladesh Bank. The latter reflected temporary central bank financing of budget deficit.
Banks have now come under pressure to increase deposit and lending interest rates, following the sharp monetary expansion accompanied by rising inflation, rapid import growth and declining foreign exchange reserves. With limited options available to the authorities to contain inflation and stem the decline in foreign exchange reserves, monetary tightening became unavoidable. Bangladesh Bank has thus decided to increase the Statutory Liquidity Requirement (SLR) from 16 per cent to 18 per cent, including an increase in the Cash Reserve Ratio (CRR) from 4.5 per cent to 5.0 per cent, with effect from October 1, 2005. This tightening of the monetary policy was necessary, since an overly expansionary monetary stance poses serious risks for macroeconomic stability and rapid credit expansion could give rise to major credit quality problems later on. (This is the second instalment of a report -- Bangladesh Poverty Reduction Strategy Paper Forum Economic Update: Recent Developments and Future Perspectives -- prepared by the World Bank that the FE is publishing in a serialised form. The first instalment of the report was published on January 17)


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Recent economic developments of Bangladesh

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