Sunday, July 26, 2009

The Resilience of Bangladesh's Economy May Again be Tested This Year


Submitted by Zahid Hussain on Wed, 07/22/2009 - 11:25

The Bangladesh economy entered FY10 in a position of strength, notwithstanding some pretty tough global circumstances. Good recovery in agriculture, a sustained growth in exports and remittances, and a steady growth in services helped achieve an estimated overall growth of 5.9 percent in FY09, compared with 6.2 percent in FY08. A decline in international commodity prices driven by the global recession and an improvement in domestic food supplies brought inflation down from 10 percent in FY08 to an estimated 7 percent in FY09. Rice prices have remained stable too at nearly 40 percent below the peak reached in April, 2008. The economy has shown reasonable stability in terms of most other macroeconomic indicators. The external current account has been in a large surplus; the exchange rate has been stable; foreign exchange reserves have reached record high levels of nearly $7.5 billion; fiscal balances have been contained; and private credit growth has remained decent.

This is all good news but it doesn’t mean Bangladesh goes totally unscathed by those tough global circumstances.

Economic growth in FY10 is expected to further moderate, marking the fourth consecutive year of a declining growth rate. So far, the global recession has affected Bangladesh mainly by way of a decline in non-garment exports, slower growth in manpower exports (remittances), and some slackening in investment momentum. And of course a number of Bangladesh’s major trading partners are projected to be in a deep recession in 2009 – the US economy is expected to shrink by 3 percent, the EU area by 4.5 percent while growth for countries in the Middle East is projected at 3.1 percent, compared to 6 percent achieved in 2008.

So what are some of the risks Bangladesh may be looking at in the months ahead?

• It may be difficult to sustain the rise in agricultural growth achieved last year because of capacity constraints in the dominant crop sector and depressed rice prices so far this year.

• The declining trend in the manufacturing sector, particularly in export-oriented industries, is also expected to continue. Continued weakness in external demand – as reflected in recent declines in export orders for knitwear and woven garments -- may moderate growth of export earnings further from 12 percent experienced during the first eleven months of FY09.

• Investment may remain subdued. LC opening and settlements for the import of capital machinery declined respectively by 24.5 percent and 9.3 percent in March-May, 2009 relative to the same period in 2008; and growth in credit to the private sector in April fell below Bangladesh Bank’s monetary policy target of 18 percent. Weak demand for credit has left the banking system awash with liquidity.

• The performance of the services sector is susceptible to the weakening of manufacturing activities as well as a possible further slowdown in remittance growth. The outflow of migrant workers declined by 33 percent last year, which is expected to manifest in slowdown in remittance earnings in the near-term.

These risks occur against a background in which the current low inflation cannot be taken for granted. Non-food inflation has been rising since December, 2008. Food inflation began to rise from April, 2009. Recovery in advanced economies may tighten international commodity markets leading to resurgence of international commodity price increases later in FY10. The large increase in the nominal rate of protection to consumer goods, provided with the FY10 budget, could also contribute. Real estate prices appear to be heading upwards, which can potentially impact consumer prices with a lag. Bangladesh Bank will therefore have its hands full in conducting a monetary policy in FY10 that aims to accommodate the economy’s credit needs while keeping inflation below 7 percent.

Hopefully the risks highlighted above will not materialize. If history is any guide, we can count on the resilience of the Bangladesh economy but policy vigilance must not be relaxed for a moment.

End Poverty in South Asia 
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