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FEATURE STORY

Bangladesh Economic Update - November 2010

November 11, 2010

Last Update: November 11, 2010 - According to revised estimates, Bangladesh grew by 5.8% in FY10 despite the slow global recovery and continued severe power shortages.


" Given the slow global recovery, severe power shortages, and labor unrest in the garments sector, this growth performance is noteworthy, "

Sanjay Kathuria

Lead Economist for Bangladesh

Growth driven by consumption

Growth came mainly from the services and industrial sectors driven by growth in consumption, which contributed 4.2 percentage points. Key reasons include:

- Strong remittance inflows, rebound in construction activities;

- Growth in rural non-farm activities supported the growth in consumption

Investment continued to be one of the major constraints to faster growth in FY10. Gross domestic investment remained stagnant at 24.4% of GDP reflecting both stagnant private and public investment rates. Weaknesses in the investment climate, rather than financing of investment, continue to constrain growth.

Reforms Continue

Reforms progressed in FY10, despite some setbacks. The ongoing and prospective changes in tax policy and administration could be critical for Bangladesh’s growth prospects. There has also been progress in reducing structural constraints to investment.

There has been some improvement in the institutional framework for facilitating public and private investments such as Special Economic Zones Act, Public-Private Partnership guidelines, Bangladesh Infrastructure Finance Fund.

However, there were some setbacks in governance issues: proposed amendments to the Telecommunication Act and the Anti-Corruption Commission Act were not followed through.

Inflation rose in FY10, driven by food price increases

Inflation rose from 6.7% in FY09 to 7.3% in FY10. Inflation (year-to-year) rose every month (except March and April 2010) and reached 8.7% in June 2010. Due to continued volatility in food prices, inflation remained somewhat volatile at around 7.5% in July-August 2010. Rural food inflation stood at 10.4% while urban food inflation reached 12% in June.

The price of coarse rice in Dhaka in September 2010 was 50% higher relative to September 2009. Meanwhile, non-food inflation has been declining recently. After increasing from 3.7% in July 2009 to 7% in December 2009, it has gradually dropped to 5.2% in June 2010.

Exports

Exports and the terms of trade appear to have deteriorated. Bangladesh’s exports achieved a growth rate of 4.1% for the year after declining for much of FY10 (year-to-year). The positive trend continued in the first two months of FY11 with a growth rate of 28.8%. Exports of readymade garments have grown at 1.2% in FY10, which is the slowest growth since FY02, while the volume of manufactured goods increased by a rate of 5.2%.

The global recession caused a drop in retail sales in Bangladesh’s main export destinations. During the period May-July of FY10, exports of readymade garments to the US and Germany – the two largest export markets – declined by 4.1% and 7.9% respectively.

Remittances

Total remittance inflows to Bangladesh grew strongly for most of FY10, but the monthly pace slowed down and turned negative at the end of the fiscal year. In FY10, remittances reached $11 billion, a 13.4% increase compared to last year.

However, between January-June 2010 the growth rate was only 5.2%, from 22.8% during July-December 2009. Preliminary data for July-August 2010 show a continuation of the downward trend, with remittance inflows declining by 0.8%. Foreign exchange reserves continued to rise. The external current account surplus rose to US$3.7 billion in FY10, over 50% higher than previous year.
 

GROWTH OUTLOOK

GDP growth is projected to be 6.1-6.3% in FY11. This estimate is largely based on proposed higher public and private investment. However, there are several downside risks. A weak global recovery could dampen the recovery in exports and further slow down remittances. But the key issue is domestic- energy shortages, which pose the biggest threat to an increase in growth rates.

Cost of new power purchase agreements

Recognizing the importance of reliable power for industrial growth, the government is contracting domestic and foreign private power producers on an emergency basis. While providing such power would help sustain growth, it also imposes additional fiscal costs.

The additional fiscal cost of the new power agreements is estimated to be between Tk.52.4 billion and Tk. 55.8 billion, which is equivalent to 0.67-0.72% of GDP. Considering the loss of production that would result from inadequate electricity, such power agreements may be unavoidable at the moment. But this may prove to be expensive and a short-term solution. Implementing long-term strategies for improving power supply is crucial for Bangladesh.

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