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Bangladesh

Briefing Notes for the Launch in Dhaka, 6 May 2010

Slight deceleration in economic growth

Global economic crisis affected countries of South Asia adversely but generally to a lesser extent as compared to countries in other subregions of Asia and the Pacific. The crisis penetrated domestic economies of the subregion through substantial decline in exports and slowdown in capital inflows. However, GDP growth has remained positive even though decelerated somewhat in 2009 from strong growth achieved in 2008 in most cases. Generally domestic demand plays a bigger role than external demand in these economies.

In Bangladesh, GDP growth was 6.2% in 2008 and decelerated only slightly to 5.9% in 2009. Growth was underpinned by good performance in agriculture, which accounts directly for some 20% of GDP and employs more than half the labour force. The slowdown in industrial growth mainly resulted from export decline for most of the items other than apparels and textiles. The exports of apparels continued to grow despite the crisis because of the focus of Bangladesh on the lower ends of the market that were relatively less affected from the downturn. Growth in overseas workers’ remittances helped in sustaining domestic demand. However, decline in capital goods imports meant weakness in new investment activities, not altogether unexpected given the export demand weakness and other uncertainties associated with global economic crisis. For 2010, GDP growth is projected at 6.0%, supported by a recovery of credit to the private sector, remittances holding up, enhanced execution of the government’s capital budget, and continued donor support to help advance structural reforms and address infrastructure bottlenecks. Growth in the manufacturing sector is expected to slow in 2010 as an economic slowdown in all of Bangladesh’s main export markets tempers demand for the sector’s biggest-selling export category, readymade garments.

Inflation remains a key policy concern

A sharp increase in food and fuel prices in 2008 created hardships for large populations in countries of South Asia. As inflation adversely affects the poor disproportionately, it is a serious problem for many countries in the subregion with high incidence of poverty. Despite deceleration in inflation in 2009 in some countries the rates remain high. Therefore, controlling inflation is and will remain a major challenge for the subregion. In Bangladesh, lower international food and fuel prices drove inflation down to 6.7% in 2009 from 9.9% in 2008. Deceleration in food inflation was much sharper from 12.3% in 2008 to 7.2% in 2009. An improved performance of the agriculture sector particularly in production of rice and wheat helped in this also. Non-food inflation has been comparatively lower and remained relatively stable.

Trade declines sharply but workers’ remittances stay strong

The global economic crisis impacted adversely on expansion of both exports and imports. At the same time, workers’ remittances held up strongly and provided support to the current account balance. In Bangladesh, the balance of payments strengthened considerably in 2009 with a current account surplus of 1.0% of GDP. Imports growth decelerated markedly from 26.1% in 2008 to 4.1% in 2009 after the onset of the global financial crisis and lower demand for capital and intermediate goods. Lower food and fuel import prices and a good harvest also played a role. The apparel and textile industries continued to expand because Bangladesh largely produces for the lower end of the market which was less affected by the downturn. Total exports grew at 15.8% in 2008 and 10.3% in 2009 which, when compared with the double-digit declines experienced by major exporting countries of the region, clearly shows that Bangladesh has become more competitive than other Asian and Pacific economies in the exports of textile and garments. At the same time overseas workers’ remittances increased 22% in 2009, to $9.7 billion, being almost 11% of GDP and lending further support to the current account balance. The Bangladeshi taka remained relatively stable.

Acceleration in expansionary fiscal policy

As for all other subregions of Asia and the Pacific, Governments in South Asia used expansionary fiscal and monetary policies to counter the negative fallout of the global slowdown and moderate the decline in growth. Of some concern is the continuation of high budget deficit in some countries, while in others fiscal deficits improved somewhat in 2009 as compared to 2008. Furthermore, inflationary pressures are growing. Consequently, some tightening of monetary policy is expected also.

In Bangladesh, the budget deficit was contained at 4.0% of GDP in 2009, partly due to under-implementation of development budget. The budget deficit is targeted at 5% of GDP for 2010. The expected increase in budget deficit is due to rising cost of subsidies and other current expenditures resulting from various stimulus packages to help export-oriented industries as well as salary hike of government employees. On the other hand, there is need to strengthen efforts to raise tax revenue especially because slowdown in earnings from customs duty due to falling value and volume of imports, partly due to global economic crisis.

Sustained high and inclusive economic growth needed for rapid poverty reduction

Widespread poverty continues to be a serious problem for all countries in South Asia. Therefore, accelerating economic growth is crucial to bring down poverty levels. The challenge will be how to make growth more inclusive by spreading its benefits to larger segments of the population. More resources should be devoted to provision of basic services such as education, health, sanitation and housing particularly for those belonging to lower income groups. Targeted programmes for the benefit of the poor in the broader framework of social protection should also be a priority. The Indian National Rural Employment Guarantee Scheme being successfully implemented in India can be replicated in many developing countries. The scheme provides guaranteed employment at minimum wage for 100 days each year to every rural household whose adult members volunteer to do unskilled manual work.

The inadequacies of physical infrastructure remain a key constraint holding back the potential of economic growth. Of particular concern is electricity shortage, where disruptions in the supply of electricity are compromising growth as a result of closures of factories and economic activities. Quality of life and human capital are adversely affected in case of frequent electricity outages of long durations. Huge investments are needed to enhance capacity of electricity generation. At the same time, renovation of transmission and distribution lines is necessary to minimize electricity losses. Potentials of trade in electricity among countries of the subregion should be explored and subregional cooperation in electricity generation and distribution should be promoted to overcome electricity shortages.