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FEATURE STORY

Bangladesh Economic Update Fall 2011

October 25, 2011

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Bangladesh has limited room for maneuver to cushion the impact of a second global slowdown. Rapid growth in subsidies, sustained high rate of growth of credit to the private sector and monetary financing of the fiscal deficit have led to the decline in maneuverability. Close Quotes

Sanjay Kathuria
World Bank Lead Country Economist for Bangladesh

Continuing Growth but Risks are Increasing

October 25, 2011 - Real GDP grew at 6.7 percent in Fiscal Year 2011 (July 2010-June 2011), continuing the upward trend in growth.

Growth in FY 11

According to the latest Bangladesh Economic Update for 2011, growth was strong in FY11, reaching 6.7% , and rebounding from a decline seen in FY06-09. Good performance in manufacturing and construction, two successive years of bumper harvests in the crop sector, as well as sustained high contribution from the services sector contributed to the growth.

High Inflation Remains a Concern

Inflation is high and volatile, with the year-on-year rate reaching 12 percent in September 2011. This is the highest recorded since FY99. Increases in the overall CPI were driven by food prices, but non-food prices have also started rising in recent months. The rise in non-food inflation has been driven by rise in prices of clothing and footwear, transport, furniture and household equipments, and miscellaneous goods and services.

Both supply and demand side factors explain inflation in Bangladesh. Rising international commodity prices were the main source of food price increases. Rising oil prices also result in rise in prices of almost all other commodities in the consumer basket. The growing gap between domestic demand and domestic production appears to have contributed to the rise in non-food inflation that was concentrated in non-energy items.

Risks Increasing

Risks in the global economy can affect Bangladesh in several ways. The S&P downgrade of US debt as well as the debt problems in the Euro Zone are affecting the international markets and renewing fears of another global slowdown. This time around, limited fiscal and monetary space in developed countries increases the chances of a protracted slowdown. If this slowdown occurs, it can affect Bangladesh’s balance of payments through its impact on exports and remittances, put pressure on the exchange rate, increase economic uncertainty, and, in turn, weaken investment and growth.

Domestic policies will also affect Bangladesh’s economic prospects. A slow pace of reforms in the investment climate can affect domestic and foreign investment, as can inadequacies in energy supply and the poor quality of other infrastructure. The reversal of trade reforms as well as weakening of the financial sector can also affect export growth and investment. Expansionary macroeconomic policies could increase risks on the current account and make inflation management more difficult.

Unlike in 2008, Bangladesh has less policy space to cushion the impact of a second global slowdown through fiscal stimulus packages and monetary easing. Rapid growth in subsidies, sustained high rate of growth of credit to the private sector as well as recourse to monetary financing of the fiscal deficit have led to the erosion of the fiscal and monetary policy space. Much improved fiscal and monetary discipline combined with stronger efforts to address the energy and infrastructure deficits will be critical for sustaining growth performance. Maintaining the long-established tradition of sound macroeconomic management will also be important.

Prospects

The strong growth performance of FY 11 can be repeated in FY12 if exports continue to grow and if garment exports benefit from the agreement reached during the recent India-Bangladesh Summit, remittances continue to recover, and if investment is boosted by improved infrastructure services – particularly power.

However, maintaining the enabling environment to allow a repeat of the growh performance in FY12 will be a challenging task considering the growing downside risks.