The New Nation - Internet Edition

UNB, Dhaka

Scaling down Bangladesh's GDP growth below 6 percent in the current adversity-ridden fiscal year, the Asian Development Bank blamed the setback on erosion of business confidence, extensive flooding and the cyclone, and a slowdown in external demand for garments.

"GDP growth is expected to be below 6 percent in FY2008 compared to 6.5 percent in the previous year, because of erosion of business confidence, extensive flooding and the cyclone, and a slowdown in external demand for garments," says the development-funding agency in its Quarterly Economic Update.

ADB country director Hua Du formally launched the Quarterly Economic Update at a press conference at her office, showing the country's latest economic health.

The growth outlook points to the need to boost business confidence, restore flood-and cyclone-affected infrastructure and livelihoods, and augment external competitiveness.

About the business atmosphere shaken by a purge in the interim period, the ADB noted that the anti-corruption drives of the caretaker Government, which apparently created some fear and uncertainty in the investor community, have started easing. "The caretaker government recognized the problem and undertook several measures to boost business confidence."

The ADB apprehended that the fiscal deficit is likely to increase to 4.7 percent of GDP in FY2008 compared to 3.2 percent in the preceding year.

It pointed out that the rise in subsidies following the increases in oil and fertilizer prices on the international market amplified pressures on the fiscal balance. "Slow progress in implementing the annual development program, the main vehicle for implementing the Government's development agenda, continues to undermine the efficiency of public spending," it further said.

The multilateral donor agency once more focused on bad state of banking in the country. It attributed slowdown in private-sector credit growth to uncertainty and low business confidence rather than the tightening of monetary policy.

It further noted that the excess liquidity in banking remained substantial at Tk 136.7 billion at the end of December 2007, causing some banks to lose interest revenue and thrive on higher lending rates.

Banks' gross non-performing loans (NPLs) to total advances marginally declined to 14 percent at the end of September 2007 from 14.3 percent at the end of September 2006.

The NPLs of Nationalized Commercial Banks (NCBs), which is 26.9 percent, and specialized banks, which is 31.8 percent, remained high because of a variety of government interventions, inefficiencies, and lack of competitiveness.

"The interest spread of the banking system remained high at 6.1 percent, indicating banking-system inefficiencies and market segmentation," says the ADB report.

In its updated account of the economic scenario ADB mentioned that broad money growth reached 14.7 percent in December 2007 down from 22.3 percent in December 2006. "This was fostered by a decline in the growth of domestic credit, mainly the private-sector credit."

About a crucial macroeconomic indicator like inflation, which contributed to severe consumer woes, the donor agency said on a point-to-point basis, inflation increased to 11.6 percent in December 2007 from 10.1 percent in July 2007.

"The inflation might be put under 9 percent if there is bumper Boro production in the upcoming season," Hua Du told the report-launching function.

The Asian bank found a mismatch in fertilizer marketing. "The Government is providing huge subsidy to supply fertilizer to the farmers at lower prices. But farmers in most places pay higher prices to procure needed fertilizer. Fertilizer-distribution system needs to be streamlined to improve performance of the fertilizer market," said the ADB country chief.

It also spoke against the under pricing of energy products, saying that it poses considerable risk in macroeconomic management. The administered prices of petroleum products have already generated substantial fiscal and quasi-fiscal costs to the Government, it said.

The quasi-fiscal costs arise from government guarantees against loans negotiated by Bangladesh Petroleum Corporation (BPC) from domestic and international banks.

"In February 2008, BPC's liabilities to domestic and international banks are estimated at about $1.3 billion. If BPC fails to pay its loan on time, payment is vested upon the Government with future fiscal implications."

The ADB country director commented that the oil-price issue cannot be avoided as they think it largely disturbed government fiscal management.

In April 2007, the Government raised prices by about 21 percent for diesel and kerosene, and about 16 percent for octane and petrol.

"Even after this price adjustment, the implicit subsidy for diesel and kerosene remains substantial. Using the average domestic and international prices of diesel and kerosene for January 2008, the implicit subsidy is estimated at $1.2 billion or 1.6 percent of GDP in FY2008. The implicit subsidy for diesel is $0.34/liter and for kerosene, $0.33/liter," the Update said.

Continuation of the high fuel subsidy will adversely affect the country's domestic and external balances, implying reduced expenditures for social and physical infrastructure and decreasing the country's long-term growth potential, said the donor agency, implicitly prescribing a further raise in fuel prices.

"If subsidies are contemplated for the benefit of the poor, targeting mechanisms would be needed; in practice, these are not easy to implement effectively. To offset the impact of price adjustments on farmers, cash transfers through social safety-net programs from the budget may be undertaken to enable farmers using an irrigation system to pay for diesel."

The ADB cautioned that a large infrastructure project like the Padma bridge is planned for its benefits, but it might also carry adverse social and environmental impacts, including land acquisition and resettlement.

"During the detailed design stage, the findings of the social and environmental impact study will need to be thoroughly discussed with those affected."