WASHINGTON, May 17, 2010 — Bangladesh needs to overcome its severe infrastructure and energy deficits if it is to maintain growth at its recent 6 percent average over the medium term, according to the World Bank’s latest Economic Update. 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.
“Easing the severe domestic supply constraints is absolutely critical to Bangladesh’s economic outlook,” said Ellen A. Goldstein, World Bank Country Director for Bangladesh. “Redressing this will require domestic reforms and increasing trade integration with countries in the region and the rest of the world. The recent positive developments on cooperation between Bangladesh and India, as well as regional cooperation more broadly, have the potential to do a lot of good for Bangladesh.”
The report forecasts strong growth of 5.5 percent in the current fiscal year (FY10), mainly driven by increased consumption and public development expenditure.
“This robust growth is impressive given the prevailing circumstances in the global economy,” said Sanjay Kathuria, World Bank Lead Country Economist for Bangladesh. “In addition to consumption growth, Bangladesh’s economy has benefitted from improvement this year in the implementation of public investments. Another positive development is strong growth in domestic revenues.”
The report says 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.
The report also warns against inflationary pressures. 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.
“Growth in the next fiscal year hinges on remittances, easing of energy constraints, and pursuit of structural reforms,” said Kathuria. “We expect GDP growth in the range of 5.5-6 percent. Achieving growth at the higher end of the range will require major efforts to address the country’s energy constraints.”
Consumption growth outlook is worsening due to a possible slowdown in remittance growth. Migration continued its downward trend with 43.5 percent fewer workers finding employment abroad in FY10 (July-Dec) compared to FY09. Moreover, a reported 72,000 migrant workers have returned home in calendar year 2009, which is one third more than in 2008.
“This means that remittances growth may start declining at some point, which clouds the outlook on private consumption growth,” said Zahid Hussain, World Bank Senior Economist for Bangladesh.
In a special section on Fiscal Management in Bangladesh, based on the forthcoming Public Expenditure and Institutional Review, the Bank commends Bangladesh for maintaining aggregate fiscal discipline, but points to significant concerns related to resource-drain by state-owned enterprises, revenue mobilization, quality of public investments, and efficiency of expenditures.