Briefing Notes for the Launch in Dhaka, March 2009
Growth moderates but remains robustThe global slowdown that has come in the aftermath of the financial crisis is having an adverse impact on the real economies of South Asia. However, the adverse impact on Bangladesh is not as strong as in some other, more open, economies of the Asia-Pacific region. Bangladesh achieved a robust growth of 6.2% in 2008, down only slightly from 6.4% in 2007, despite back-toback floods and a devastating cyclone. The Government was able to implement effective rehabilitation programmes and timely policy interventions. The economy recorded 3.6% growth in agriculture in 2008, 6.9% in industry and 6.7% in the services sector. The growth of agriculture was nearly one percentage point lower than the previous year, as almost every subsector in agriculture was affected by natural disaster. The slowed growth in the industrial sector was due to a decline in its two major subsectors, manufacturing and construction. Manufacturing suffered from a loss of business confidence and labour unrest in the export-oriented garment sector. Slower growth in the construction sector growth in 2008 resulted from less private construction because of higher prices of raw materials and a slowdown of public sector construction. The pace of growth in the services sector declined only marginally. With global economic crisis deepening, growth of Bangladesh’s economy is expected to further moderate to 5.5% in 2009.
Rapid increase in inflationInflation has been driven up in all the countries of South Asia, partly by unrelenting pressures from higher international commodity prices, particularly the prices of oil, basic metals and selected food items. Inflation in Bangladesh in 2008 rose to around 10% in 2008, up from 7.2% in 2007. To curb inflation, the Government’s short-term measures included selling food grains at subsidized prices on the open market, withdrawing customs duties on imported food grains and edible oil, increasing food grain imports, lowering interest rates against import credit of food grains, regular monitoring of markets, and fixing the maximum retail price for edible oil. With fall in oil and other commodity prices in international markets, inflation is expected to come down in 2009.
Fiscal situation deterioratedIn Bangladesh, the fiscal deficit as a percentage of GDP increased from 3.7% in 2007 to 4.8% in 2008 despite healthy growth in Government revenue. The pressure on fiscal balance increased due to large increases in spending on flood and cyclone relief and an expansion of subsidies following the rise in fuel, fertilizer and food grain prices in the international market. Fiscal policy is expected to remain expansionary to promote growth and employment. Subsidies on food and fertilizer are expected to remain in place to contain inflation and boost production of agricultural crops.
External balances under pressureThe surge in prices of fuel oil, food and other commodities created severe problems for the external balances of most countries in South Asia. In Bangladesh, despite an increasing trade deficit propelled by higher imports, the current account balance showed a surplus resulting from robust growth in export earnings and workers’ remittances. The foreign exchange market remained mostly stable and the country’s currency, the taka, appreciated by 0.4% against the dollar during fiscal 2008. But the real effective exchange rate depreciated, and Bangladesh enjoyed some gain in export competitiveness. Earnings from exported merchandise recorded growth of 15.9% in 2008. Several export commodities—knitwear, petroleum by-products, tea, textile fabrics, raw jute, ceramic products, woven garments, home textiles, electronics, terry towels, leather, frozen food and footwear—recorded higher growth than in the previous year. Merchandise imports showed a 26.1% growth in 2008. Imports of consumer goods recorded the highest growth, mainly due to robust import growth in food grains. While imports of intermediate goods grew at a lower rate, imports of capital machinery declined. The inflow of workers’remittances increased by one third, reaching nearly $8 billion in fiscal 2008. If the global economic crisis persists for a longer period, workers’ remittances may fall in the coming years, causing difficulties for balance of payments. The country’s foreign exchange reserves were nearly $6.2 billion at the end of fiscal 2008.
Poverty and widespread inequalities remain major challengeAmong long-term challenges, poverty remains a major problem for most countries in South Asia. Also, economic and social inequalities remain widespread. The main challenge for countries in the subregion, therefore, is not only to improve growth rates on a sustained basis but also to make them more inclusive for a rapid reduction in poverty and inequality. The composition of sectoral growth has important implications for pro-poor growth. Agriculture, construction and small and medium-sized enterprises (SMEs) generate pro-poor growth through employment generation, and should be supported.
To benefit from employment opportunities, the development of human resources is essential. In turn, education and health services are key to the development of human resources. Public provision of these services is crucial to the poor, as they cannot afford to pay the prices charged by private providers. Print and public media should be vigorously used to change people’s attitude towards girls’ education and other forms of social exclusions and to ensure that the poorest of the poor have access to information on available opportunities.
Social safety nets are also essential for the poor and vulnerable who are unable to benefit from economic growth directly or indirectly. This support should be strengthened to provide a coping mechanism for the poor, especially in the event of macroeconomic shocks such as current global economic crisis. Without such interventions to address the problem of poverty and inequality, rapid economic growth cannot be sustained over the long term, for there are clear links between inequality and social unrest and violence.
Lack of physical infrastructure is a major impediment to business growth in South Asia, most notably shortcomings in electricity service. Huge gaps between supply and demand of electricity exist in several countries in the subregion, and these gaps will widen unless new electricity capacity is added. Involvement of the private sector through private public partnerships is the only way to meet the growing needs for energy. Along with generating more electricity, it is important to efficiently utilize existing capacity. Transmission and distribution losses are massive, partly due to theft. Rehabilitation and proper maintenance of the distribution system should be a priority to minimize transmission and distribution losses.