Economy of Bangladesh – INTRO:
Real GDP is projected to grow at 5.5 percent in FY10, from 5.9 percent in FY09, driven by consumption and public development expenditure. Private consumption expenditure held up well because of strong growth in remittances and the non-rice agricultural sector. Public consumption expenditure rose because of increased public sector pay and an additional stimulus package for the export-oriented sectors. Public investment also picked up slightly in FY10. However, sluggish private investment is largely responsible for the projected decline in growth in FY10.
Inflation rose to 9 percent in February 2010, from 2.2 percent in June 2009. This sharp increase was driven by food inflation arising from a shortfall in domestic rice production, rising world food prices, and high food inflation in India. Non-food inflation also rose, from 3.7 percent in July 2009 to 6.1 percent in February 2010. While domestic agriculture output and world food prices are likely to have a strong bearing on inflation in the next few months, an incremental tightening of monetary policy, as announced in the Monetary Policy Statement for the second half of FY10, can also help dampen inflationary pressures.
Reserves have increased due to strong remittance and foreign aid inflows. Despite a decline in exports, the current account surplus rose in the first seven months of FY10 to US$2.2 billion, compared with US$0.38 billion in FY09. Compressed import demand and strong remittance inflows in the first half of FY10 led to this surplus. This was complemented by a surplus of US$418 million in the capital and financial accounts, leading to a US$2.1 billion-plus surplus in the overall balance of payments. Reserves rose correspondingly to exceed $10 billion (5.7 months of imports) in January 2010. In the face of these inflows, Bangladesh Bank was forced to accumulate net additional reserves of US$2.1 billion in the first seven months of FY10 in order to prevent the nominal taka value from appreciating.
The fiscal deficit remains sustainable, underpinned by good revenue performance. It is projected to be contained at around 4 percent of GDP in FY10, well within the sustainable threshold. This is slightly higher than last year’s fiscal deficit of 3.7 percent of GDP - and derives from the implementation, retrospectively, of the public sector wage increase, higher safety net expenditures, a likely further boost to the Annual Development Program (ADP) this year, and a potential increase in energy and fertilizer subsidies because of rising international prices.
FY11 growth outlook is dependent on the easing of domestic supply constraints, particularly energy. Global recovery is off to a stronger start than initially anticipated. Currently, supply issues are more problematic than those of demand; Energy shortages will continue to stifle Bangladesh’s recovery. The estimated demand-supply gap is currently one-third of demand (2,000 MW)) in peak hours. Gas shortages account for nearly half of this gap. Maintaining growth at its recent 6 percent average over the medium term will thus be a challenge for Bangladesh, given the current infrastructure and energy deficit. Redressing this will require domestic reforms and increasing trade integration with countries in the region and the rest of the world. The Bangladesh Prime Minister’s visit to Delhi earlier this year helped to promote Indo-Bangla cooperation in security, power, trade, connectivity, water sharing, and resolution of other long-standing bilateral concerns. If fully implemented, these will lay the basis for higher investment and growth by improving energy security and connectivity.
GDP growth in FY10 is driven by growth in consumption and public development expenditure. In fact, growth throughout FY07-09 in Bangladesh was driven mainly by consumption, to the extent of over 60 percent of growth in GDP during this period. In FY10, private consumption growth is likely to be sustained by remittances, which grew by 17.4 percent in the first nine months. In addition, growth in non-rice agriculture appears to have sustained growth in rural incomes and hence private consumption. Public consumption expenditure received a boost from the 52 percent average increase in public sector pay and an additional stimulus package for the export-oriented sectors.
GDP growth is projected to decline slightly in FY10 compared to 5.9 percent in FY09 because of sluggish growth in private investment. The sluggishness is evident in the relatively low 4.3 percent increase in imports of capital machinery, in nominal dollars, in the first half of FY10. Foreign direct investment dropped to $228 million in the first seven months of FY10 compared with $662 million in the first seven months of FY09. The probable decline in private investment in the first seven months of the year was partly offset by an increase in public investment, which is projected to be higher this year due to the larger size and improved implementation of development expenditures. The ADP implementation rate has increased from 34.4 percent in the first eight months of FY09 to 39 percent in the first eight months of FY10.
Net exports will continue to drive down GDP growth, as they did in FY09. In Bangladesh, the net impact of trade on GDP growth is usually negative. In FY10, the contribution of export growth (in terms of national accounts) to GDP growth is likely to decline from 2.5 percentage points in FY09 to 0.9 percentage points in FY10. At the same time, the negative contribution of import growth is also likely to decline (from -3.2 to -1.6 percentage points of GDP between FY09 and FY10), as expected, so that the overall contribution of net exports to GDP growth will probably remain at around -0.7 percentage points of GDP.
Domestic supply-side constraints have contributed to sluggishness in private investment and exports. Lack of reliable power and gas supply remains a major constraint on businesses in Bangladesh. While total gas production has declined by 2.4 percent from July to December 2009, gas sales to the power sector have declined by 20.3 percent during the same period, resulting in frequent power cuts. Even factories within EPZs experienced power cuts. Many large RMG (garment) factories have their own power plants, but have had operations disrupted because of gas shortages. Production in the knitwear sector is especially hard-hit because spinning, dyeing and finishing factories need uninterrupted gas supply for full production. Power and gas shortages have also adversely affected capacity utilization and investment in the services as well as domestic market oriented small and medium-scale manufacturing. Industrial production in apparel, ceramics, fabrics, steel and particles are particularly hard hit. Many factories in industrial areas in Dhaka and Chittagong are unable to use more than 50 percent of their capacity, while small industries, that cannot afford diesel generators, are on the brink of closure.