The New Nation - Internet Edition

BUSINESS REPORT

The inflation rate in Bangladesh reached 10 per cent in March this year, up from 7.2 per cent in June last year on an annual average basis, said Asian Development Bank (ADB) yesterday.

"Higher international food and nonfood commodity prices and shortfall in domestic food grains production heightened inflation. Bottlenecks in the distribution and retail management chain, monetary accommodation of previous years, and panic buying also pushed inflation higher," the ADB said releasing its latest Quarterly Economic Update (QEU) yesterday.

However, the ADB said the weighted average nominal exchange rate remained stable at Tk68.6:$1 since November 2007. "This is helping to dampen inflationary pressures partly by cutting import costs, especially food items." Despite a bumper boro crop, the ADB warns that risks of a supply shortage are possible if the next aman and boro crops are affected by natural disasters or other factors.

Referring to the agriculture sector, it says that the floods and cyclone caused extensive damages to the agriculture sector by affecting crops, livestock, poultry and fish farms. Aman production in FY2008 is estimated at 9.7 million tons compared with 10.8 million tons in FY2007. Boro production is expected to be 16.5 million tons, 10 per cent higher than the preceding year. Encouraged by higher prices of food grains and desperate need to recoup the aman loss, farmers across the country brought more land under boro cultivation. The yield is good owing to the increase in land fertility following the floods and the weather remained favorable. The government launched massive rehabilitation after the floods and cyclone to ensure adequate supplies of inputs to farmers. Bangladesh, a net importer of food grains, has been seriously affected by food price shocks, driven by higher international prices and domestic production shortfall following successive natural disasters.

In this regard, the ADB suggests that over the short-term, the focus of policy responses should be on targeted interventions to protect the poor and vulnerable in the face of rising food prices. "Over the medium to longer term, the focus should be on improving agricultural productivity," it says.

The ADB report observes that severe floods, a cyclone, and low business confidence affected the economy during the first half of FY2008. But the economy rebounded in the second half with timely and effective measures by the government to restore business confidence and boost agriculture production. Despite a good revenue performance, large subsidies pose significant fiscal challenges. Higher external aid flows and workers' remittances provided a cushion to the external balance. Food price shocks affected the economy with macroeconomic and poverty impacts.

On industrial and service sectors, it says that during the first half of FY2008, the industry sector was affected by sluggish investment and low export-oriented manufacturing activity. Erosion in business confidence and slowdown in external demand for garments affected manufacturing. But in the second half of FY2008, the industry sector is rebounding as indicated by the uptrend in export-oriented manufacturing with effective measures taken by the government to restore business confidence. Construction is likely to show a downtrend in FY2008 because of a sharp increase in the price of construction materials including mild steel rod, cement, brick, bitumen and paint. Rising prices of construction materials also affected the implementation of ADP. Growth in services sector has picked up and is continuing its past growth momentum.

Pointing to the overall economic growth, the ADB's QEU observes that GDP is expected to grow by 6 per cent in FY2008, down from 6.5 per cent in FY2007 because of moderating agricultural growth following the extensive flooding and cyclone. The fear and uncertainty among the investor community, apparently created by the government's comprehensive anticorruption drives, have started to ease.

The country has high growth potential. But there are several downside risks in its near-to medium-term prospects. These include political uncertainty, weak infrastructure, vulnerability to natural disasters and volatility in oil and food-grain prices.

On fiscal management, it says that revenue performance improved after several years of poor performance. Government revenue collection by the National Board of Revenue rose by 23.1% in July-March FY2008 over the corresponding period of FY2007. But sustaining this improvement in revenue collection will depend on the rebound of private sector activity and strengthening tax administration. The fiscal deficit in FY2008 is likely to increase to 4.8 per cent of GDP compared with 3.2 per cent in the preceding year. The pressures on the fiscal balance amplified because of post-flood and post-cyclone relief and rehabilitation expenditures; and a sharp rise in subsidies following the rise in fuel, fertilizer and food grain prices in international markets. Slow progress in implementing the annual development program continues to undermine the efficiency of public expenditure.

On monetary and financial sector developments, the ADB report says that broad money growth declined to 15.2 per cent in February 2008, down from 20 per cent in February 2007. This was caused by a decline in the growth of domestic credit, mainly the credit to the government. But private sector credit growth increased, showing significant pick up in credit to trade and industry sectors. Banks' gross non-performing loans (NPLs) remained almost unchanged (13.2 per cent) at the end of December 2007 compared with the end of December 2006. But the NPLs of state-owned commercial banks at 29.9 per cent and specialized banks at 28.6 per cent remained high. The interest spread of the banking system remained high at 6 per cent showing banking system inefficiencies and market segmentation which needs to be contained.

On balance of payments scenario, the ADB report observes that exports rebounded with the recovery in garments exports. Growth in total exports during July-March FY2008 reached 12.4 per cent, driven by woven garments and knitwear exports. Imports during July-February FY2008 rose sharply by 21 per cent over the corresponding period of FY2007. Higher import bills amplified by rising international commodity prices, pushed the trade deficit to $3.2 billion during July-February FY2008, up from $2.1 billion during July-February FY2007. Despite a surge in the trade deficit, a sharp rise in current transfers, particularly workers' remittances, resulted in a surplus of $328 million in the current account. Even with growing pressure on the current account, the foreign exchange reserve stood at $5.8 billion at the end of April FY2008, up from $5.1 billion at the end of June FY2007, aided by higher net foreign aid receipts.