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MCCI observes in latest review of economy
Political rivalry, weak governance may hold back growth momentum
FE Report

The Metropolitan Chamber of Commerce and Industry (MCCI) fears continuing political confrontations and weakening of the institutions of economic and political governance may hold back economic growth momentum in future.
"The economy is still on the growth path though concern has been expressed as to how long the economic growth momentum can withstand the continuing political confrontations and weakening of the institutions of economic and political governance," the MCCI observed in its latest review of economic situation.
It said country's economic performance in the fourth quarter (April-June of FY06) indicates a marginally slower growth in Gross Domestic Product (GDP) compared to the encouraging GDP growth and control on inflation in the third quarter (January-March of FY06) of the current fiscal year.
The major growth area was industry, particularly manufacturing and construction, which recorded notable expansion in the quarter under review, the MCCI said and added that the performance of the agriculture sector was relatively weaker compared to that of the previous year.
The chamber said that the country's economic performance in the fourth quarter of FY2005-06 was influenced essentially by favourable external demand as well as higher investments in the industrial sector.
"Indicators of industrial investment during the quarter show an expansion of 15.0 per cent in total investment compared to 5.0 per cent increase in the same quarter of the previous fiscal. Investments in large and medium scale industries increased by 10.0 per cent and the same in small and medium enterprise (SME) increased by 25.0 per cent," the MCCI said.
In the same quarter of last fiscal, the chamber said, investment in the large and medium scale industries increased by 4.0 per cent while SME investment increased by 15.0 per cent.
The MCCI said that a favourable aspect of the country's macro economy during the period under review was the return of stability in the foreign exchange market, and an improvement in the country's foreign exchange reserve.
"Increased inflows of remittances and better performance of the export sector together helped raise Bangladesh Bank's foreign exchange reserve by US$430 million in the review quarter (compared to a decline of US$10 million in the corresponding quarter of the last year) to US$3340 million at end June 2006," it added.
About agriculture sector, the chamber said the recovery in the agriculture sector that began since December 2005 continued in the review period. However, unfavourable weather conditions affected the supply of many short-term crops, it said adding that total production target of foodgrains for FY06 was re-fixed at 27.65 million tonnes, which was 1.2 per cent lower than the previously revised target.
According to the latest estimate, it said, total production in FY06 will be 5.8 per cent higher than the actual production of 26.13 million tonnes during the previous fiscal. In FY2006, the performance of the agriculture sector mainly reflected the normalisation of foodgrains production following reduced output levels in FY2005, it added.
While focusing on industrial sector, the MCCI said, the growth of QIP (quantum index of production) of all industry was 11.5 per cent compared to 16.9 per cent and 9.8 per cent in quarter two (Q2) and Q1, respectively, of the same fiscal. However, the growth rate was 4.1 percentage points higher in Q3 of FY06 compared to the QIP growth of 7.4 per cent in Q3 of FY05.
The performance of the overall industrial sector is reflected in the movement of QIP for the manufacturing sub-sector, it said adding that the average manufacturing QIP increased by 12.0 per cent in Q3 of FY06 compared to 18.2 per cent of the immediate previous quarter.
The major contributors to the growth of manufacturing QIP in the review period are jute, cotton, wearing apparels and leather products (25.96 per cent), food, beverage and tobacco (10.41 per cent), wood products and furniture (15.15 per cent), fabricated metal products (8.92 per cent), and chemical, petroleum and rubber products (7.20 per cent).
In the services sector, it said, a major increase in the value-added occurred in transport, storage and communication sub-sectors. Growth in the transport, storage and communication sub-sector was driven primarily by the storage sub-sector to which the flow of bank loans in nominal terms increased by 37.5 per cent in Q3 FY06.
In the same period, bank advances to transport and communication sub-sectors increased by 23.9 per cent, it said adding that the trade sector also experienced growth in the review period mainly because of the increase of merchandise imports during the period.
It said monetary policy was directed chiefly to curb inflation and stabilise the foreign exchange market during the quarter under review. However, the inflationary pressure maintained an upward trend although the depreciating trend in the exchange rate, witnessed in the previous quarters, was reversed, and the Taka appreciated albeit marginally during the quarter, it added.
During the review period, it said, the Bangladesh Bank continued to pursue a conservative monetary policy by increasing interest rates. This action led to a significant reduction in the excess liquidity in the banking system, which fell to Tk.35.48 billion at the end of April 2006 from Tk.109.42 billion at the end of June 2005. There was also a fall in the rate of credit growth to the private sector (to 17.0 per cent in March 2005 from 19.5 per cent in March 2005), the MCCI said.
As for the money supply, the twelve-month growth of M2 broad money accelerated to 19.9 per cent in April 2006 from 15.9 in April 2005. During the same period, the growth of the more liquid narrow money (M1) increased to 24.4 per cent from 16.9 per cent.
In April 2006, it said, the year-on-year growth of domestic credit was 20.6 per cent, compared to 18.6 per cent in April 2005.
"The rise in domestic credit during the period was essentially due to the rise in public sector credit, which went up by 33.4 per cent between April 2005 and April 2006 from 19.0 per cent growth during the April 2004 to April 2005 period," MCI said.
While the growth of net credit to government increased to 21.9 per cent in the period between April 2005 and April 2006 from 16.6 per cent in the earlier year, the growth of credit to the other public sector increased significantly to 58.5 per cent from 24.5 per cent, and the growth of credit to the private sector declined to 16.9 per cent from 18.5 per cent during this period.
Disbursement of agricultural credit during July-April 2005-06 was Tk. 46.60 billion, which was 17.5 per cent higher than in July-April 2004-05 while the recovery of agricultural credit during July- April 2005-06 also stood markedly higher at Tk. 33.02 billion, or 45.8 per cent higher than in July- April 2004-05.
As a result, the net disbursement of agricultural credit stood at Tk. 13.58 billion in July-April 2005-06 compared to Tk. 17.03 billion in July-January 2004-05 -- showing a 20.3 per cent decline, it noted.
Net disbursement of industrial term loans during July-March 2005-06 stood significantly higher at Tk. 20.41 billion compared to Tk. 3.55 billion during the corresponding period of the preceding year.
About price situation, the MCCI said, the rate of inflation, which maintained an upward trend since the second quarter of FY05, increased in the fourth quarter of FY06 as well.
The annual rate of inflation increased to 7.08 per cent in April of Q4, FY06 from 7.07 per cent in Q3, FY06, it said adding that higher food prices accounted for the major portion of the upward impetus to inflation in the review period.
"There were some divergences between the inflation rates in rural and urban areas in both FY06 and FY05. While the inflation rate was lower in the rural areas in April FY04, in the same month of FY06 and FY05 the rural areas experienced a higher inflation rate compared to urban areas," it said.
This divergence was largely the result of higher food prices, it said adding that the principal factors, other than food prices, responsible for the rise in inflation in the review quarter were the increase in fuel price and higher transportation costs.
"The inflation rate on point-to-point basis increased to 7.46 per cent in April of Q4FY06 from 6.16 per cent in Q3FY05. The tight monetary policy pursued by the central bank since July 2005 has not been effective to contain the rate of inflation," MCCI said.
The collection of tax revenue worsened in the review quarter, the MCCI said adding that in the April-May months of Q4 FY06, total tax collection (NBR portion) grew by 11.1 per cent compared to 21.4 per cent in April-May, FY05.
In the Q1, Q2 & Q3 of FY06, the growth of total tax collection was 12.6 per cent compared to 12.9 per cent in the same period of FY05, it said adding that during July-May, FY06, total revenue collection by NBR was 7.0 per cent short of the revised target, although it increased by 12.9 per cent during the period as against 14.4 per cent increase in the corresponding period of the previous fiscal year.
The increase in tax revenue receipts was led essentially by the collection of supplementary duties, VAT and income taxes. However, collection of VAT marginally declined to 20.1 per cent growth in July-May, FY06 from 21.2 per cent growth in July-May, FY05, and the collection of income tax revenue also fell to 19.5 per cent from 19.8 per cent, while the collection of supplementary duties (SD) increased by 11.9 per cent from 5.4 per cent.
On the other hand, the collection of customs duty decelerated to 0.2 per cent in July-May, FY06 from 7.1 per cent in July-May, FY05, MCCI said adding that the fall in the collection of customs duty during FY06 was due to the reduction of duty rates on a large number of imported items during the year.
Total deficit financing of the government during July-April, 2005-06 was Tk. 68.54 billion, of which domestic financing was Tk. 29.51 billion or 43.1 per cent of the total and the remaining Tk. 39.03 billion or 56.9 per cent of the total came from foreign financing, it said.
In the same period of the preceding fiscal, it said, 78.3 per cent of the deficit was financed with foreign funds, and the other 21.6 per cent of the deficit was met with domestic financing.
Outstanding domestic debt of the government at the end of April 2006 thus increased by Tk. 76.1 billion to Tk. 635.71 billion, or by 12.6 per cent over June 2005, the MCCI said and adding that out of the total domestic debt of Tk. 635.71 billion at the end of April 2006, borrowing from the banking sector was Tk. 256.77 billion, and the borrowing from non-bank sources stood at Tk. 378.94 billion.
The implementation of the Annual Development Programme (ADP) in July-March 2005-06 was only 45 per cent of the target, which is the lowest during the past four years, it said adding that in the same nine-month period of FY05, ADP implementation rate was 47 per cent of the target.
The MCCI said trade balance recorded a smaller deficit of US$2519 million in July-April, FY2006 compared to the deficit of US$2935 million during July-April, FY2005. The improvement in the trade balance occurred due to a significant deceleration of import growth alongside some improvement in export receipts in the same period, it said.
While export growth recorded an improvement to 20.14 per cent in July-April, FY2006 from 14.91 per cent in July-April, FY2005, imports grew at a much lower rate of 7.33 per cent during July-April 2005-06 compared to 19.93 per cent in the same period of 2004-05.
The decline in the growth in imports originated from lower imports of consumer goods, which declined by 19.7 per cent (US$210 million) during the period compared to increase of 35.3 per cent (US$278 million) in July-April FY2005.
The growth during the period was driven primarily by the increase in raw materials and capital machinery. In July-April FY2006, raw materials and capital machinery increased by 10.1 per cent (US$502 million) compared to 7.0 per cent (US$324 million) in July-April FY2005.
While focusing on remittances, MCCI said, inward remittances grew by 28.8 per cent (US$297 million) compared to 18.8 per cent (US$160 million) in Q4, FY05.
In absolute terms, the total amount of remittances increased to US$ 4800 million in FY06 from US$ 3848 million in July-May, FY05, and US$ 3371 million in FY04.
About foreign exchange reserves, it said, despite the significant increase in remittances and exports in the review quarter, the foreign exchange reserve position increased only marginally (by US$120 million compared to a $780 million increase in Q4 FY05).
As of end June 2006, the foreign exchange reserve position stood at $3340 million compared to $2930 million in June, 2005, and $ 2705 million in June 2004, it said.
As in the past, the MCCI sent a questionnaire to leading entrepreneurs seeking comments. It received comments from 10 entrepreneurs who expressed their concern over deteriorating supply of electricity and gas, widespread corruption, discretionary powers -- still retained -- of the tax officials and, above all, political confrontations and recent tendency amongst a section of workers to take law into their own hands at the instigation of outsiders.
They also complained against unrealistic approach in the decision-making process of some important government agencies. One entrepreneur pointed out the recent requirement of the Securities and Exchange Commission (SEC) that any company having paid-up capital exceeding Tk. 400 million must go public, noting this is against the spirit of free enterprise.