Bangladesh Economic Update - May 2011

Last Update: May 2011 - In Bangladesh, while real GDP is expected to grow at a healthy 6.2 percent in FY11, inflationary pressures have emerged and the external position has weakened.

Continuing Growth

Growth projections for Bangladesh in FY11 are strong because:

• Consumption, the largest component of GDP, received a boost from increased public and private wages, and there are expectations of a good agricultural performance that would boost consumption;
• Investment is likely to have increased, as indicated by increased imports of capital machinery;  
• Better economic performance across all sectors, including agriculture, is expected compared to the last year;
• Revenue performance is significantly better than initially projected and is one indicator of strong economic performance. 
  

...Despite Emerging Stresses

However, inflationary pressures have emerged. Consumer Price Index (CPI) growth reached 10.5% in March 2011. This is driven mainly by a 13.9% rise in food prices. 

The current account balance has also deteriorated. For FY11 a current account deficit of 0.8% is estimated as opposed to a 3.7% surplus in FY10. This is because:

• Even though cumulative exports rose by 40% by February 2011, from 4% the year before, cumulative import also rose by 37% in the first half of FY11. This is well above the 5.4% growth of FY10;
  
• Rising prices of food and fuel are intensifying pressure on the external account;
  
• Remittances fell sharply in the first nine months of FY11 to around 4%, as compared to the 19% growth seen during the same period the previous year. This is because of a decrease in net outflow of migrant workers.

Mixed Progress on Reforms

Recent policy changes present a mixed picture. Tax reforms have gained momentum. The National Board of Revenue has drafted the new Value Added Tax (VAT) law that is expected to be presented to Parliament soon.

Power tariffs at bulk and retail level have been increased, helping to reduce the losses of the Power Development Board. This will also reduce fiscal subsidies.

Efforts to tighten reserve money growth are underway. The 13% interest rate cap on banks for general lending has been lifted for general lending, other than for agricultural sector and industrial term loans.

However, new draft guidelines for telecommunication license renewal give cause for concern. These guidelines seek to levy renewal fees that are high by global and regional standards—this is applicable to the four cell phone companies whose 2G licenses have to be renewed in 2011—and this could adversely affect the overall performance of the sector as well as the Digital Bangladesh agenda, and discourage further investment in the sector.

Other issues of concern include slow progress on the public-private partnership (PPP) agenda, and a possible weakening of the Anticorruption Commission (ACC).

Growth Outlook FY 12

Real GDP growth rate is projected to be about 6.4% in FY12, provided short-term risks are prudently managed. The increase is based on the expectations of higher public and private investment as power generation shortages are expected to be alleviated to some extent. A recovery in remittances will also support consumption growth, although the outlook for such an increase is uncertain.

The short-term risks include rising food and fuel prices, deteriorating remittances and possible drawdown in reserves, a growing fiscal deficit, and stock market volatility and its potential impact on the banking sector.
Over the longer term, alleviating power shortages, raising public investment and removing the bottlenecks for private investment will be critical in ensuring sustainable growth.

Special Feature: Food Inflation

Consumer Price Index growth reached 10.5 percent in March 2011 (over that of March 2010), extending the trend that began in the previous fiscal year.
Overall inflation rose mainly because of a rise in food prices, which rose to 13.9 percent by March 2011. The food price rise has been driven by the upward trend in international prices.

The current rise in food prices will adversely affect the rate of poverty reduction. In fact, simulations suggest that the pace of poverty reduction would have been adversely affected.  The 19 and 45 percent increase in rice and wheat prices respectively between June and December 2010 would have led to an approximate 1.6 percentage point decline in the pace of poverty reduction.