The New Nation - Internet Edition

Staff Reporter

The country's growth rate will continue to maintain the same pace at 6.5 per cent for two fiscal years in a row like that of the 2006-07 year despite repeated floods this year, according to a recent projection by the London-based Economist Intelligence Unit (EIU).

The floods, however, will have an adverse impact on agricultural production, loss of which will be supplemented by the record inflow of remittances sent by Bangladeshis working abroad, the EIU added.

"The composition of growth in 2007/08 and 2008/09 will be similar to that in 2006/07, as record inflows of workers' remittances underpin activity in the services sector and the manufacturing industry continues to make a positive contribution," EIU said in an outlook released recently.

It said rates of growth in the agricultural sector, however, would continue to lag behind those in manufacturing and services in 2007/08, as the sector strives to overcome the devastation caused by the floods this year, which destroyed crops in more than one-half of Bangladesh's 64 districts. "Assuming normal monsoon rains in 2008, the agricultural sector is expected to make a strong recovery during 2008/09."

The economic growth is set to slow slightly from 6.5% in 2006/07 to 6.2% in 2007/08 as the agricultural sector tries to overcome the devastating effects of the recent floods.

The country report titled 'Bangladesh at a glance: 2008-09' said the main near-term risk to economic growth is inflation, which stood at a 10-year high in September.

"The fear is that high inflation could entrench itself, particularly since the central bank (unlike its counterparts in the region) has not tightened monetary policy and is unlikely to do in the near future," it said.

It said there are also signs that domestic and foreign investments have weakened over recent months. Domestic investors have been reluctant to expand capacity, with many wary of attracting the attentions of the Anti-Corruption Commission (ACC), which appears determined to investigate all cases of unexplained wealth. "This means that, unlike in the past, investments are being scrutinised by the ACC."

The report said that Bangladesh's external environment is likely to become slightly less favourable in 2008 as economic growth in the US and euro area-Bangladesh's largest export markets-remains sluggish.

The real GDP growth in the US, which absorbs around 24 percent of Bangladeshi exports, is forecast to increase slightly, to 2.1 percent, from an estimated 1.9 percent in 2007.

By contrast, economic growth in the euro area (the destination of more than 30 percent of Bangladeshi exports) is forecast to lose momentum, slowing from an estimated 2.5 per cent in 2007 to 2.2 per cent in 2008.

The external environment is expected to improve slightly in 2009 as economic growth in the US picks up to 2.8 per cent, but growth in the euro zone is forecast to remain sluggish.

"Despite a small increase in global crude oil production capacity, we doubt that OPEC will release enough oil on to the market to reduce the current imbalance between demand and supply. We expect oil prices (dated Brent Blend) to remain high in 2008, averaging US$69/barrel, before falling to US$63.3/b in 2009."

Owing to the fact that Bangladesh imports nearly all of the crude petroleum that it needs, high international oil prices will have a detrimental effect on Bangladesh's balance of trade, and are expected to contribute to record trade deficits in 2008 and 2009.

About inflation outlook for the period, EIU said price pressures are expected to persist throughout the forecast period, as the authorities attempt to reduce gradually the subsidy on domestic fuel prices against a backdrop of persistently high global oil prices.

It said, "We expect consumer price inflation to average 7.7% in 2008 before moderating slightly, to 6.5%, in 2009."

Food prices would continue to be inflated due to the hoarding of goods by local food merchants, and the rising cost of imports from India, which is a major supplier of food to Bangladesh via both formal and informal routes.

Assuming normal harvests for both India and Bangladesh, food price inflation should ease in 2009.

On exchange rate, it projected that following a modest depreciation of 1.4% against the US dollar in 2007, the Taka is forecast to fall by 3.7% against the US dollar in 2008 and 3% in 2009.

"We expect the exchange rate to average Tk72.5:US$1 in 2008 and Tk74.8:US$1 in 2009," EIU said.