DHAKA, October 25, 2011: Bangladesh grew at 6.7 percent in FY11, continuing its recent upward trend in growth, says the World Bank’s latest bi-annual economic update on Bangladesh. Risks in the global economy, insufficient fiscal space to cushion the impact of a possible second global slowdown and domestic policies will be major factors determining Bangladesh’s near-term economic prospects.
The FY11 growth rate reflected good performance in the manufacturing and construction sector, two successive years of bumper crop harvest and sustained high contribution from the services sector. However, a slowdown in remittances in FY11, high and volatile inflation, overshooting of monetary targets , financial sector weaknesses, growing external imbalances and the increasing fiscal deficit as well as the composition of deficit financing remain areas of concern.
Bangladesh’s strong performance in FY11 can only be repeated if exports continue to grow; garments exports benefit from the agreement reached during the recent India-Bangladesh Summit; and remittances continue to recover and if investment is boosted by improved infrastructure services, particularly power, says the economic update.
The near-term economic prospects for Bangladesh depend on global economic condition as well as on domestic policies and management. Given the growing external and domestic risks, the growth outlook in FY12 remains uncertain.
A protracted slowdown in the global economy could affect Bangladesh through several channels. It can affect Bangladesh’s balance of payments through its impact on exports and remittances, put pressure on the exchange rate and increase economic uncertainty which might weaken investment and growth. However, lower international commodity prices, particularly oil and food, will work in Bangladesh’s favor.
“Bangladesh has limited room for maneuver to cushion the impact of a second global slowdown if it happens,” said Sanjay Kathuria, World Bank Lead Country Economist for Bangladesh. “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.”
Moreover, a slow pace of reforms can affect the rate of investment, as can inadequate energy supply and poor infrastructure quality. The changes in trade reforms and weakening of the financial sector can also affect export growth and investment. “Improved fiscal and monetary discipline combined with stronger efforts to address energy and infrastructure deficits will be critical to sustain the growth performance,” said Zahid Hussain, World Bank Senior Economist for Bangladesh.
“It will be vital for Bangladesh to ensure sound macroeconomic management, since expansionary macroeconomics policies could increase risks on the current account and make inflation management more difficult,” added Lalita Moorty, Senior Economist for Bangladesh in Washington.