Bangladesh Economic Update May 2012

Healthy Economic Growth in Bangladesh

June 3, 2012 – While Bangladesh’s growth performance has been improving in recent years, the Bangladesh Economic Update for May 2012 finds that GDP growth has moderated from 6.7% in FY11 to 6.3% in FY 2012. This is due to unfavorable external economics and internal supply constraints.

While this 6.3% GDP growth in FY12 is higher than the developing country average (5.5%), it is lower than the South Asia average (6.5%).

Bangladesh has maintained this average growth over the last three years through strong manufacturing and remittance growth. Transport and financial intermediation have led growth in services.

Continuing Macroeconomic Pressures

Inflationary pressures, particularly from an increase in non-food prices, have worsened. Overall inflation is in double digits and non-food prices rose 14% in March 2012, compared to 4.3% a year earlier. This has been driven by expansionary monetary and fiscal policies.

On the other hand, food price increases have declined from 13.8% in September 2011 to 8.1% in April 2012, good news for the poor.

The fiscal deficit has increased despite significant increases in revenue. Recurrent expenditures are likely to overshoot the original 2012 budget target, driven by larger-than-budgeted growth in subsidies and transfers. The central government budget deficit increased by more than 2.5 times from July to January compared to the same period the previous year.

The balance of payments is under strain. The current account surplus during July-March, FY12 was $456 million compared to nearly $710 billion during same period the previous year, owing largely to the sharp rise in petroleum-product imports to feed the liquid fuel-based power plants. With exports starting to decline in March 2012, pressure on the balance of payments could intensify.

Outlook – The Challenges

Uncertainty in Bangladesh’s leading trade markets poses risks to accelerated growth. High unemployment, low business and consumer confidence, and volatility in financial sectors remain major threats to Bangladesh’s two major export markets, Europe and the United States.

In addition, the combination of current levels of inflation, the fiscal deficit, and reserves mean that Bangladesh has very little policy space to respond to the crisis, unlike its situation during the last global economic and financial crises.

Energy shortage poses as much of a risk to growth as do global uncertainties. The overall shortages of energy continue to deter fresh investments and expansion projects. Authorities need to proceed with longer-term solutions to the energy problem to ensure that the net additions to capacity already made can be sustained.

Policy – Coordinated Macroeconomic Strategies

A coordinated policy response will be essential to restore macroeconomic stability and accelerate growth. Stabilization policies will need to focus on creating fiscal space, and containing government borrowing.

The longer-term growth outlook depends on acceleration of structural reforms to raise savings and investments rates, improve trade prospects, and ensure balance of payment sustainability. This would entail modernizing the tax regime and strengthening public financial management, and require increased tax revenues to address the large infrastructure deficit.

Growth acceleration also needs urgent reforms to address the looming skills deficit and enable a continuation of manufacturing and export growth.

Finally, improving the investment climate and undertaking trade-related reforms would be needed to increase domestic and foreign investment, essential for accelerated growth.