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Bangladesh AD outlook 2009 updated

Bangladesh AD outlook 2009 updated

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Published by: gmaula on May 07, 2010
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Bangladesh
Bangladesh experienced adverse eects rom the global downturn, primarily through slower growth o exports and workers’ remittances, and damped investment sentiment. Still, it has maintained relativelystrong expansion, reduced ination, and kept a current account surplus. For FY, this
Update
maintainsthe projections made in March or moderately slower growth and ination relative to FY, but noworecasts a small current account surplus rather than a defcit. The medium-term trajectory will dependheavily on the Government’s ability to implement reorms, which include substantially boosting budgetrevenue and raising inrastructure investment.
Updated assessment
GDP growth o 5.9% is estimated or FY2009 (ended June 2009), belowthe perormance o the previous year but somewhat higher than theprojection o 5.6% made in the
 Asian Development Outlook
(
 ADO 2009
)released in March this year (Figure 3.2.1).Tis stronger outturn is due to better than expected agriculturalexpansion, at 4.6%. Te output o 
aman,
the second rice crop (harvestedin November–January), rose to 11.6 million tons, a 19.6% rise over theprevious scal year and reecting a strong recovery rom the severely damaged FY2008 crop.
Boro,
the major rice crop (harvested in April–May), is estimated at 17.8 million tons, marginally exceeding FY2008’srecord output. Crop production beneted rom avorable weatherconditions as well as strong support rom the Government that enabledarmers to access inputs and credit. Services sector growth (at 6.3%, downrom 6.5% in FY2008) moderated, largely as a result o slower export andimport activity.Industrial growth o 5.9% ell below both the
 ADO 2009
projection o 6.6% and the 6.8% outturn o FY2008, as export production in the secondhal o the scal year slowed more sharply than expected. Weakeningconstruction activity and power outages pulled back manuacturinggrowth. Slow implementation o energy projects continued to restrictindustry’s expansion, although the new Government (elected in January 2009) has given power generation and gas development a high priority, asoutlined in the ruling party’s election maniesto and reected in a newpublic–private partnership (PPP) scheme.GDP growth in FY2009 was again driven by consumptionexpenditure (Figure 3.2.2). Accounting or about our hs o GDP,it grew by 5.8%, up rom the previous year’s 5.4%. Growth in privateconsumption, which constitutes about three quarters o GDP, was, at6.0%, stronger than FY2008’s 5.5%. Public consumption as a share o GDPdeclined or the third consecutive year.Private investment, growing by 7.2%, lied its share rom 19.3% o GDP
3.2.1 GDP growth by sector
0246810 0908072006 %
6.65.96.26.4
GDP growthServicesAgricultureIndustry
Source:
Bangladesh Bureau o Statistics,
National AccountsStatistics
, May 2009.
 This chapter was written by Mohammad Zahid Hossain, Md. Golam Mortaza, andShamsur Rahman of the Bangladesh Resident Mission, ADB, Dhaka.
3.2.2 Contributions to growth (demand)
2005 06 07 08 09Percentage points-202468GDP growthStatistical discrepancyConsumptionNet exportsInvestment
Source:
Bangladesh Bureau o Statistics,
National AccountsStatistics,
May 2009.
 
118 Asian Development Outlook 2009
Update
in FY2008 to 19.6% in FY2009, reecting improved business condenceollowing the orderly return to elected government. Public investment,in contrast, declined urther, sliding rom 5.0% o GDP to 4.6%, asimplementation o the annual development program (ADP) remainedweak. Overall investment remained unchanged at 24.2% o GDP.I Bangladesh is to attract greater investment, particularly romabroad, it will need to address some increasingly binding constraints.Tese are elt especially in inrastructure and the business environment,and include acute power shortages, transportation bottlenecks, inadequateand inecient port acilities, high business startup costs, and slowinstitutional reorms.Ination ell steadily through the scal year, rom 10.8% year on yearin July 2008 to 2.3% in June 2009 (Figure 3.2.3). Annual average inationdeclined to 6.7% in FY2009 (slightly lower than the
 ADO 2009
projectiono 7.0%), rom 9.9% in FY2008. Te sharp decline in import pricesand the rise in domestic ood production were the main actors. Tesuccessive cuts in domestic uel prices in October and December 2008and in January 2009, in line with the all in global oil prices, also helped(though the xed administrative prices o uel have not since been raisedas oil prices rose subsequently). Although ood ination has declinedsharply, nonood ination has edged up since January 2009, reecting theaccommodative monetary policy o Bangladesh Bank, the central bank.Reaching 24.0% in June 2009, the growth o net credit to governmentwas high throughout FY2009, reecting lower availability o externalnancing. Te 19.2% growth in money supply (M2) in June 2009 washigher than the central bank’s annual program target o 17.5%. Privatesector credit rose by 14.6% in June 2009; this was less than the annualprogram target o 18.5% and was largely on account o the slowdown incredit demand as the global recession damped domestic economic activity (Figure 3.2.4).Yields on reasury bills rose marginally during the year to March2009, but then ell sharply along with commercial banks’ call money ratesas bank liquidity surged (Figure 3.2.5). Banks’ weighted average lendingrate remained unchanged at 12.3% rom the beginning o the scal year.o bolster credit conditions and the economy, Bangladesh Bank cutboth the reverse repo and repo rates (1–2-day maturity) by 25 basis pointsin March 2009 to 6.5% and 8.5%, respectively. Moreover, in the March–June quarter, it adjusted its open-market operations to allow a markedrunup in reserve money, which immediately ed through to much lowershort-term money market rates. However, with no corresponding declinein commercial lending rates, Bangladesh Bank decided to use mandatory measures and directed banks to lower their maximum lending rate to13% in a urther efort to lower the rate structure and boost credit to theprivate sector. (Until that decision, the maximum rate had been 16% onagricultural loans.)Te weighted average deposit rate rose to 7.5% in March 2009 rom7.0% in June 2008. Te interest spread o the banking system narrowedto 4.8 percentage points in March 2009 rom 5.7 percentage points inMarch 2008.Revenue collection in FY2009 is estimated at 11.2% o GDP, similar toFY2008 (Figure 3.2.6). Revenue growth missed its target because o a all
3.2.3 Change in consumer price index andcomponents
02468101214AprJan09OctJulAprJan 08OctJulAprJan 2007%Nonfood
b
Food
b
Overall
b
Overall
a
a
Year on year.
b
12-month moving average.
Source:
Bangladesh Bank,
Economic Trends
, June 2009,available: http://www.bangladesh-bank.org, downloaded24 August 2009.
3.2.4 Growth o monetary indicators
51117232935Credit to private sectorCredit to governmentBroad moneyMayFeb09NovAugMayFeb 08NovAugMay2007%
Source:
Bangladesh Bank,
Economic Trends,
July 2009,available: http://www.bangladesh-bank.org, downloaded28 August 2009.
3.2.5 Interest rates
048121620LendingCall money12 day reverse repo12 day repoQ209Q4Q208Q4Q207Q4Q206Q4Q22005%
Sources:
Bangladesh Bank,
Economic Trends,
June 2009;
Major Economic Indicators: Monthly Update,
July 2009,available: http://www.bangladesh-bank.org, bothdownloaded 24 August 2009.
 
South Asia Bangladesh 119
in import prices that eroded the import-stage tax base, which accountsor over 40% o tax receipts. Domestic indirect taxes also perormedbelow target as economic activity decelerated in response to the globaleconomic downturn. Te revenue outturn is low compared with countriesat a similar stage o development and limits essential public spendingon inrastructure and human development. Te poor perormancestems rom the narrow tax base, excessive exemptions, and weak taxadministration.Te new Government announced several tax measures in the FY2010budget, among others expanding the tax base, withdrawing exemptionsand exclusions, simpliying procedures, amending laws, and streamliningtax administration. As a step toward eliminating tax holidays, itintroduced a system o reduced corporate tax rates or certain sectors inlieu o existing tax holiday schemes. In an efort to expand the tax base,the Government will also conduct surveys covering cities, districts, andsubdistricts to identiy those who have avoided tax (by not ling). It alsoannounced a tax amnesty program or FY2010: a modest 10% tax is leviedon the declared amounts i they are invested in areas specied by theauthorities, such as the stock market.Savings on ood, uel, and ertilizer subsidies enabled by the allin international commodity prices and by underspending in the ADPsaw FY2009’s public spending come in at 15.3% o GDP, lower than thebudget target o 16.3%. As savings on public spending were larger than theshortall in revenue, the scal decit o 4.1% o GDP was narrower thanthe budget target o 5.0%. O the total decit, 2.3% o GDP was nanceddomestically and 1.8% externally.In FY2009, the net losses o the 44 nonnancial state-ownedenterprises shrank sharply rom $1.5 billion to only $22.5 million. Ahigh prot earned by the Bangladesh elecommunication Regulatory Commission (rom auctioning licenses to telecoms utilities) and higherearnings by Bangladesh Oil, Gas and Mineral Resources Corporation(rom international oil companies aer cost recovery was completed)largely ofset the combined losses o all other enterprises (Figure 3.2.7).Bangladesh Petroleum Corporation generated a prot or part o the year when international oil prices were low, but incurred lossesagain when these prices rose but administered domestic prices were leunchanged. Its overall loss in FY2009 was about $520 million, comparedwith about $1.4 billion a year earlier. Te corporation is expected torecord large losses in FY2010 i oil prices remain high and administeredprices unadjusted. Bangladesh Power Development Board also registeredsizable losses in FY2009.Te trade decit narrowed markedly in FY2009 (by 1.4% o GDProm a year earlier) as import payments grew more slowly than exportearnings. Export growth decelerated steadily as FY2009 unolded due toweak global demand and declining prices, rom 42.4% in the rst quarterto 19.4% in the rst hal and urther to 10.3% or all FY2009 (Figure 3.2.8).Weak retail sales in industrial economies caused a slowdown in garmentexport orders over the year. Moreover, as product prices ell by morethan raw material prices, exporters’ prot margins shrank, retardingsales o some products. Earnings rom “other” exports ell rom a yearearlier, largely due to a sharp drop in demand or processed leather,
3.2.6 Government revenue
036912NontaxTaxTotal09080706052004 % of GDP10.111.211.110.210.710.5
Source:
 
 Asian Development Outlook 
database.
3.2.7 Profts and losses at selectedstate-owned enterprises
-1,500-1,000-5000500Bangladesh Petroleum CorporationBangladesh Telecommunication Regulatory CommissionBangladesh Power Development BoardBangladesh Oil, Gas and Mineral Resources Corporation09080706052004 $ million
Note:
Data or 2009 are up to 29 April only.
Source:
Ministry o Finance,
Bangladesh Economic Review  2009
.
3.2.8 Growth in exports and components
-10010203040TotalOthersWoven garmentsKnitwear products09080706052004 %
Sources:
Bangladesh Bank,
Annual Report 2007–08
and
Major Economic Indicators: Monthly Update,
July 2009,available: http://www.bangladesh-bank.org, downloaded13 July 2009.

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