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Ashek Ishtiak Haq MBA 41-IBA, BBA 7th-DU Phone: 01720594959 Address: 31st Siddeswari Lane, Dhaka-1217 http://www.facebook.com/ashek.haq Bangladesh has remained an exemplary economy in the face of the global financial crisis. It has proved to be decoupled from its effect. The economy not only registered a 5.9% GDP growth performance but also recorded stellar performance of the agriculture sector, posted buoyant remittance flow and ended with historically highest record level of forex reserves. Resilience is in fact something that defines Bangladesh. Although, the country gets hit by mammoth natural disasters almost every year, its per capita income has advanced to a level of USD700 (from below USD200 in 1972) with major chunk of the achievement made since the opening up of the economy in 1991. The central bank is predicting that by 2013 the country will achieve the status of middle-income country. The annual GDP growth rate during this period ranged between 5% to 6.5%. The food production has tripled to a very impressive figure of 30 mn tonnes in 2008 from a meager 10 mn tonnes in 1972. The country has also made impressive progress in social indicators such as the infant mortality rate, access to healthy sanitation facility, primary school enrollment, literacy rate, and life expectancy. In April, Moody’s and S&P assigned their first-ever sovereign ratings to Bangladesh, which is three-level below the investment grade at a similar level to the Philippines, Indonesia, and Vietnam, and well above the ratings for Pakistan and Sri Lanka. Favorably the new ratings should help to ease the cost of capital, encourage more FDI, and reduce import and export costs (as the price of LCs should now fall).
Bangladesh at a Glance (2008-09) Population (mn,Provisional) Nominal GDP (USD bn) GDP, (USD bn, purchasing power parity, est ) GDP per capita (USD; marker exchange rate ) 144.20 Population growth 1.26% 89.38 Real GDP growth 5.90% Inflation (12-months 242.40 average) 5.95% Total investment % to GDP 620.00 at current market price 24.18% Total consumption % to GDP per capita (USD; purchasing GDP at current market power parity) 1,465.00 price 79.98% Exports (USD bn) 15.60 Imports (USD bn) 20.3 Forex reserves (March Exchange rate (av) Tk:USD 69.11 2010, USD bn) 10.14 Source: Bangladesh Bank, IMF
However, the year 2009 has presented the economy with some severe challenges such as significant volatility in export earnings, deficiencies in power, gas, and basic infrastructure, decreasing job opportunities in the overseas market, inflationary trends gaining steam and depressed investment trends. GDP The limited openness of the economy and strengthened domestic demand has helped Bangladesh to mitigate the most of the effect of the global recession.
Nominal GDP 2004-2010
100 6.6 80
in bn USD
Real GDP Growth, % yoy
6.4 6.2 6 5.8 5.6 5.4 5.2 FY04 FY05 FY06 FY07 Fiscal Year FY08 FY09 FY10F
60 40 20 0 FY04 FY05 FY06 FY07 Fiscal Year FY08 FY09 FY10F
The almost 6% GDP growth in FY09 has been possible due to the strong performance of the agriculture and service sector, while the growth in the industrial sector has stalled due to the weakened export demand. Agriculture sector’s growth in FY09 was 4.6% helped by favorable weather and optimistic price expectation. Major growth drivers in the agricultural sector were the crops and horticulture, and animal farming sub-sectors. The growth in service sector has dropped slightly to 6.3% in FY09 from 6.5% in FY08. Accounting for some fluctuations, the growth is spread over all the subsectors. The lower growth in the Wholesale and retail sector resulted because of the fall in the industrial production and commodity imports.
Growth Rate of the Major Sectors, 2003-09
10 8 6
Sectorwise GDP Composition 2009
Agriculture Services Industry
0 FY 03 Agriculture FY 04 FY 05 Industry FY 06 FY 07 Services FY 08 FY 09
Industrial Growth The growth in industry sector has dropped to 5.9% in FY09 from 6.8% in FY08. The drop in growth of the manufacturing subsector is the most significant, caused by decline in export in most of the items except for apparels and textiles. From 7.2% in FY08 it dropped to 5.9% in FY09. The mining and quarrying sub-sector enjoyed increase in growth. The growth for power, gas and water supply subsector dropped 2.3% to 4.5% in FY09 signaling the inadequacy of physical infrastructure. Both large and medium scale and small scale industries endured dip in their growth, registering 5.7% and 6.6% expansion in FY09 compared to 7.3% and 7.1% growth enjoyed in FY08. The shock to the small scale industry was relatively smaller due to its immunity from the external sector. However, the things are looking up as, the Quantum Index of Industrial Production showed a growth of 7.4% during FY09 over FY08. Quantum index of small scale manufacturing industry also increased by 7.9 percent during FY09 over FY08. A survey by the IFC also showed business confidence and investment have been picking up since October last year.
Trends in Industrial Growth
12 10 8 6 4 2 0 FY 03 Industry, as a whole Small scale FY 04 FY 05 Mining and quarrying Power, gas and water supply FY 06 FY 07 Manufacturing Construction FY 08 FY 09 Large and medium scale
Agriculture A major structural change has been observed regarding the decline in the share of agricultural GDP over the last four decades. From an agro-based economy in the 70s the country has transformed into a service-based economy. The agricultural share has dropped from over half of total GDP during 1970s to about one third during the 1980s. The current share contributed by the agricultural sector is about 21%. Despite such decline, the impact of agriculture is still predominant over the economy. It still employs half of country’s labor force most of whom are concentrated in the rural areas.
Contribution of Agriculture in GDP
700 600 500 400
in bn tk
300 200 100 0 FY 03 Agriculture FY 04 FY 05 FY 06 FY 07 FY 08 FY 09 Crops and horticulture Animal farming Forest and related services
Major policy decision such as the timely downward revision of fertilizer prices, subsidy for diesel, timely availability of and subsidy for electricity for irrigation have contributed to the production of 32.16 mn MT rice and wheat in FY08-09. This amounted to 8.1% higher growth than the preceding year. The target for FY09-10 has been set at 35.25 mn MT, which is 9.6% higher than last year. It will majorly depend upon the output performance of the upcoming Boro crop, the target for which has been set at 19.0 mn MT. Inflation After reaching the lowest level at 2.25% in June, point-to-point CPI inflation edged up to 6.71% in October, with both food and non-food prices registering a significant increase. The inflation rate crossed 9% mark in February 2010. The disquieting factor is the higher food inflation rate of 10.93%. According to the Bangladesh Bureau of Statistics (BBS) data, the inflation in urban areas increased more compared to that in rural areas.
CPI: Twelve-month Point to Point Basis
16 14 12 10 8
6 4 2 0
Bangladesh Bank predicts that inflation might go up further in the coming year as the prices of commodities on domestic and international markets has started increasing for the last few months of 2009. The main causes behind this increase are effect of unfavorable weather on the crop production during the later part of the year, rising trends in prices of rice and other commodities (price of oil increasing in the international market). Three factors can push inflation to new heights, these are pay scale hike of the Government employees, uptrend in Annual Development Program spending and pressure on food prices with special emphasis on rice. If there is no disruption in agricultural output a leading financial institution predicts CPI to average around 6.5% during FY10. Remittance Only a few years back the country used to receive USD1.0 to USD2.0 bn remittances per year. It crossed the USD5.0 bn mark in FY 05-06. In just 10 years time the foreign currency reserve grew from USD1.0 bn to USD10.0 bn. The country has enjoyed record-breaking remittance earning in 2009, which helped the international reserve to cross the USD10.0 bn mark for the first time. The remittance inflow for November 2008 was USD1.05 billion- a record for a single month receipt. This has been possible largely due to the resilient spirit shown by the migrants who sent more money than ever despite the odds posed by the global recession. Remittance as percentage of GDP increased by 0.89% to 10.84% in FY09 from 9.95% in FY08. Although the year marked a decline in the labor export, the remittance inflow reached USD10.72 bn by the end of 2009. The figure was only USD8.97 bn in 2008. Bangladesh Bank’s series of effort to funnel the money through legalized channel has helped the growth of remittance inflows. One alarming trend for the sector is, it is experiencing drastic fall in the manpower exports.
In mn USD
Export The export sector has suffered some lagged effect of the global slowdown in FY09. In the first five months, the export earnings have fallen by 6.9%. The month of November has witnessed a 7.7% decline in export receipts. The decline has been witnessed in all products, led by the fall in RMG export but exception has been observed in some export categories e.g. jute goods, engineering products, petroleum products and handicrafts.
Export & Import
in mn, USD
2009-10 F 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09
Import Reciept FOB
The two key export items garments and knitwear declined by 8.0% and 7.2%. One factor to be noted here that Bangladesh still surpassed its closest competitors, including India, for absolute textile exports. Other major items for which export fell were frozen food (17.9%), chemical products (42%), and leather (6.9%). Export of the primary products declined 6.0% whereas the manufactured product export fell by 6.2%. To boost the export sector, the Government has allocated BDT18.0 bn worth of cash subsidy in FY10. Import payments also dropped in FY10 due to the fall in rice and other commodity imports, and due to the decline in commodity prices in the international market. Import fell 5.7% during JulyDecember 2009 over the same period of 2008. The fall in rice imports is the steepest (96.3%), followed by crude petroleum (36.4%), fertilizer (35.9%), refined petroleum (26.9%), and yarn
(19.9%). Because of this decline, the trade deficit narrowed to USD1.5 bn from USD2.3 bn in last year. Combining with the buoyant remittances this has cause the current account surplus to widen further to USD1.3 bn vs a deficit of USD0.3 bn last year. L/C The growth in the L/C opening figure provides a brighter picture. In the first six months of FY0910 L/C opening has increased by 37.4%. L/C opening for industrial raw materials has reentered the positive terrain with a rise of 2.9% over the corresponding period. L/C opening for capital machinery imports has grown by 13.9% year-on-year in the July-October period. At the same time Banks have started to report decline in the excess reserves whereas inter-bank call money rates have started climbing from the near zero level. Collection of VAT has started to rise too.
Import LC's Opened 2009-10P
in mn USD
2400 2300 2200 2100 2000
Aug Oct Nov Jan Feb Jul Sept Dec Mar
This rise can particularly be attributed to improved business confidence and the recent rise in commodity prices in the international market. L/C for the import of food grains have increased by 37.4% and consumer goods by 156.5%. FDI
0.9 0.8 0.7 0.6
in bn USD
0.5 0.4 0.3 0.2 0.1 0 FY04 FY05 FY06 FY07 FY08 FY09
According to UNCTAD the most severe decline in FDI has been witnessed in the first quarter of FY09. Comparing to that, the net FDI inflow of USD941 mn in FY09- a 44.8% growth over FY08 is quite an achievement. The country received USD207 mn as FDI during the first four months of FY10. The first five months of FY10 saw positive growth in the FDI flow to the Export Processing Zone. In January 2010, the Indian telecom firm Bharati Airtel invested USD300 mn in a 70% stake of Warid Telecom. Moreover, several other foreign companies have expressed an interest in investing in the energy sector (which is underfunded).
DSE General Index
6000 5000 4000 3000 2000 1000 0
In bn USD
DSE Market Capitalization
35 30 25 20 15 10 5 0
FY04 FY05 FY06 FY07 FY08 FY09 Jan 09 Feb 09 Mar 09 Apr 09 May 09 Jun 09 Jul 09 Aug 09 Sep 09 Oct 09 Nov 09 Dec 09 Jan 10 Feb 10 Mar 10
Market Capitalization USD bn
All through 2009 the capital market was volatile. The market indicators showed an upward trend during the first 7 months of FY10. With the listing of Grameenphone (the biggest issue in history) in January 2010 the index reached 5,367.1 points, a rise of 102.6% over January, 2009. During the same period, market capitalization of the Dhaka Stock Exchange has witnessed an astronomical rise of 112.0%, from USD14.85 bn (16.7% of GDP) in January 2009 to USD31.39 bn (31.5% of GDP) by the end of January 2010. 18 companies have debuted in the countries premium bourse Dhaka Stock Exchange (DSE).
Exchange Rate USD to BDT
70 68 66
64 62 60 58
A constant supply of USD from relatively stable export income, worker’s remittance inflow and Bangladesh Bank’s continuous purchase of the USD from the local inter-bank market have helped to keep the money market stable through FY09-10. The moves led to a stable Forex market with BDT trading at around 69.06 against USD. From October BDT starts to depreciate slightly with USD/BDT hovering around 69.20 marking 0.39% depreciation from the opening level of 2009. The Way Forward With the manufacturing activities on the rise, higher growth witnessed in the service sector, pick up in the export payments, remittance on a roll, and stable forex reserve it may be concluded that things are looking up for Bangladesh. However, challenges like rising inflationary pressure, declining FDI flow, PPP projects hitting snag, and weak infrastructure blunt this optimism.
Still, ongoing strong remittance flows will not only help to support private consumption but also small-scale investment throughout 2010. The garment and textile sector (which accounts for nearly 80% exports) is well placed to benefit, having gained global market share in 2009 as US and EU demand shifted toward lower-cost Bangladeshi garments. While FDI and capital flows suffered in 2009, they have improved in early 2010. Severe power shortages are still a serious constraint on economic activity. Fortunately, even without further FDI inflows in the short term, a number of new concessionary loans from bilateral and multilateral donors in early 2010 (worth over 800 mn) have been pledged towards energy sector projects. In order to keep the country into the preferred growth trajectory the country has an uphill task of sorting out the weak infrastructure problem, attracting more FDI, keeping the inflation at a tolerable level, and overcoming the effect of the global slowdown. Adoption of an appropriate policy framework and undertaking proper regulatory reforms will be critically important to address the emerging challenges that are likely to confront the Bangladesh economy in 2010.