The New Nation - Internet Edition

UNB, Dhaka

The Asian Development Bank (ADB) forewarned Bangladesh about political disruptions in the run-up to the parliamentary polls and their outcome as a major risk for the economy of the country.

As politics is back on stream ahead of planned elections, overturning a clean-up drive in the interim period, the donor agency came up with the foreboding in its 'Asian Development Outlook 2008 Update' yesterday.

The Outlook was released yesterday around all the Asian countries simultaneously. Newly appointed ADB country director in Bangladesh Paul J Heytens unveiled the update on economic situation in Bangladesh at the agency's Bangladesh Resident Mission (BRM).

The Outlook also pointed out natural disasters as a perennial risk for Bangladesh in the current fiscal as well.

In the 'Asian Development Outlook 2008 Update' the ADB indicted several other risks, including higher-than-assumed oil and commodity prices (stressing the balance-of-payments and fiscal positions), a budget revenue shortfall, lack of a supply response by farmers, and greater-than-expected shortages in power and gas (affecting investment and growth), which the economy would face.

Responding to a question, ADB country programming head Mohammad Zahid Hossain said the government might consider the downslide adjustment of fuel oil prices if the per-barrel price went under US$ 92 on the international market.

In the meantime, news reports said oil prices plunged below $92 a barrel on the Asian market today in a continuing downslide that also brought the prices of other commodities down along its course.

"The government has to fix the amount to be given in the fuel-oil sector as subsidy. If the subsidy level is fixed, it would be easy for the government to determine the adjustment time to time," he said.

The Update raises the average inflation projection for FY2009 to 9 percent, though improved from the 9.9 percent outcome in FY2008.

"The projection takes into account the likely effects of the July 2008 domestic oil-price rise but assumes no further price adjustments. The Monetary Policy Statement of Bangladesh Bank stresses that an accommodative credit policy will stimulate production of essential food and other basic consumer items and thus will soften inflation pressures."

The economic watchdog noted that substantial risks are involved in this supply-side approach to stabilizing the economy as its first-round effects of expanding credits without a quick or substantial supply response could trigger higher inflation.

There are also risks that policies and assumptions could be upset by higher- than-expected prices for international commodities and misjudgment about the second-round effects of the July 2008 fuel-price hike.

"The central bank may need to raise interest rates to anchor inflation expectations and keep second-round effects under control," the ADB prescribes in its Outlook.

In preface to the Bangladesh chapter in the Outlook, the ADB said that for the Bangladesh economic growth and the current-account surplus were close to earlier projections as the economy showed resilience in recovering from natural disasters.

However, inflation and budgetary pressures grew.

The caretaker government that was appointed when parliamentary elections were postponed in January 2007 has undertaken economic reforms, pursued a marked anticorruption effort, and has pushed through important electoral reforms in preparation for elections expected by end-2008.

"Future economic performance will depend on the Government's ability to deepen the economic reforms recently started," the donor agency said, in this context.

Criticizing the power sector of the country, the ADB said power shortages have increasingly blocked industrial expansion, and, therefore, the country crucially needs a large expansion in generation capacity, as well as an upgrading of transmission and distribution networks.

More immediately, power supply is likely to improve somewhat in FY2009 with several public and private-sector projects coming on stream, ADB projected.

Industrial growth was also restricted by lower contribution from construction activity as growth fell (to 5.9 percent) from the prior year on a slowing in private-sector investment, the high price of construction materials, and a downsizing of the Government's Annual Development Program (ADP), it noted.

The Asian Bank further reappraised that Foreign Direct Investment (FDI) also fell. After long negotiations, Tata Group of India abandoned, in July 2008, its $3 billion investment proposal for a package of power, steel, and fertilizer projects in Bangladesh.

Declining export volumes of goods and services damped growth more than in the previous year, it noted about the downside of the economic scenario.

"Inflation moved up to 10 percent on a 12-month moving average basis in March 2008. Supply-side factors dominated, particularly higher international commodity prices and the shortfall in domestic food-grain production. Large spending on flood and cyclone rehabilitation; higher bank credits for agriculture, industry and services; and the rise in demand from the rapid growth in remittances were also factors. In response, among other measures, the Government reduced import duties on food items; and for food grain, subsidized sales, lowered the interest rate on import credit, and boosted imports."

The ADB appreciated the performance of the National Board of Revenue (NBR) for its robust revenue collection in FY2008 that jumped to 11.2 percent of GDP, or 1.0 percentage point of GDP higher than in FY2007.

The donor agency stressed further reforms in value-added tax (VAT) and income-tax laws, simplifying tax procedures, and modernizing tax administration to mobilize greater revenues.