The New Nation - Internet Edition

Staff Reporter

Stabilizing the inflation rate will be a major challenge for the policymakers (in Bangladesh) in the days ahead because a low and stable rate of inflation is critical for accelerated economic growth and poverty reduction, said Bangladesh Bank in its annual report released yesterday.

The report has drawn attention to several near and medium term downside risks and uncertainties originating from (i) the rising inflationary pressures, (ii) the sustained high global fuel oil prices, (iii) under-pricing of energy products, (iv) infrastructure constraints (especially power, ports, and transportation), (v) probable adverse effects in the RMG sub-sector from 2008 onwards due to the expiry of restriction imposed on China, (vi) restoring business confidence for strengthening private sector investment activities, and (vii) the political developments and outcome of the next general elections scheduled to be held in late 2008.

Apart from these risks, economic prospects in the near and medium term particularly for the current fiscal year are likely to be affected by the repeated floods and cyclone Sidr in the first half of the financial year.

"Taking into consideration of the present state of economy and future challenges as well as opportunities, Bangladesh Bank has estimated that GDP growth will range between 6.2 to 6.5 per cent in the current fiscal year," the report said.

The report has pointed out that there is a possibility of higher inflation in emerging markets and developing countries, particularly in South Asian region in the coming days.

Presently, Bangladesh and other South Asian countries have been experiencing inflationary pressures, mainly because of rising world commodity prices including food, fuel oil and increasing demand from rising income. Furthermore, in Bangladesh, production losses due to natural calamities have added to the inflationary pressures with a tentative prediction by 12-month average consumer price inflation (CPI) in the range of 8.1 to 8.5 per cent in FY08, the report said.

In its report, the Bangladesh Bank cautioned that the sustained high global oil prices have heightened pressure on country's balance of payments, threatened fiscal and monetary stability alongside adversely affecting the economic activity.

In this regard, the Bangladesh Bank suggested that a pricing system providing for automatic adjustment of domestic fuel prices to international market prices might be considered, with some mechanisms to protect the poor from hardships. Besides, there is a need to reduce dependency on imported petroleum products by maximizing the use of alternative indigenous fuels and enhancing the efficiency of energy use.

The Bangladesh Bank report observed that maintaining a favourable investment environment and a sound macroeconomic management are important to strengthen private sector investment in the economy. After declaring a state of emergency on January 11 last, the present Caretaker Government has taken strong steps focusing on the economic front. Though the rapid actions to anti-corruption and anti-hoarding drives are causing interruptions to some extent in the business activities, it may be noted that economic activities will further gear up when the reforms are successfully implemented.

According to the report, after the expiry of MFA quota, Bangladesh achieved a successful exports growth during the last two years. But, the probable adverse effects from the quota elimination for Bangladesh may come into reality after 2008, when the restriction imposed on China will expire. Therefore, for survival in the increasingly competitive global garment trade, a competitive RMG sector needs to be built with upgrading infrastructures, developing financial capacity of manufacturers, labour compliance standards, design and product development capability, advanced production facilities, long-term business relationship, and the development of internationally reputed customer bases. On the other hand, to reduce the overwhelming dependence on RMG, measures needed to be taken to diversify the exports.

The report suggested that Bangladesh needs to work hard to ensure a significant proportion of proposed aid for trade package for LDCs in the form of market access privileges, less stringent disciplines, and assistance in trade related capacity building. In the absence of critical breakthrough in WTO negotiations, Bangladesh also needs to continue its efforts addressing the issue of market access through bilateral and regional agreements, especially under SAFTA and BIMSTEC.