Briefing for the Launch in Dhaka, 27 March 2008
Strong growth continues amid uncertainties
- In Bangladesh, despite the uncertain political climate, GDP grew by 6.6% in 2007 – a rate virtually unchanged from 2006. The 2007 expansion was propelled by higher growth in the industrial and services sectors. Industrial growth was broadly led by continued domestic demand and buoyant external demand. Agriculture grew more slowly.
- The economy suffered losses from the severe floods of July-September 2007 (which caused considerable human distress, damage to infrastructure and immediate economic dislocation) and from a November 2007 cyclone (which killed several thousand people and damaged property and infrastructure in affected coastal areas). But because the economy of Bangladesh has developed a resilience to such calamities, and authorities have improved their ability to respond to them, the overall macroeconomic impact will likely be modest.
- The Bangladesh government’s target is to raise GDP growth to 7% in 2008. But with continuing political uncertainty, this target may prove elusive and GDP growth may remain at about 6.5%. The interim government’s anti-corruption drive is expected to improve the country’s business environment in the coming years, attracting FDI and helping the Bangladesh economy to grow.
- In Bangladesh, inflation remained at 7.2% in 2007, unchanged from the previous year. Possibly driving inflation were three key factors: supply-side constraints, political and market uncertainty and strong aggregate demand (the last resulting from economic growth and the remittances of workers abroad).
- To restrain inflation the government has followed a tight monetary policy, reduced or withdrawn tariffs on some essential goods and taken other administrative measures (breaking up trading cartels, selling essential goods on the open market at discounted prices).
- In Bangladesh the budget deficit for 2007, at 3.6% of GDP, was slightly higher than the deficit for 2006. In 2008 it is expected to increase to 5.6% of GDP – mostly because the country’s liabilities for accumulated fuel subsidies are to be included in the 2008 budget. In addition, the 2007 cyclone and floods will require the government to spend heavily on restoring health, sanitation and water and rehabilitating the damaged infrastructure. The budget deficit for 2009, however, is expected to revert to a normal level of 3.8%.
- In 2007, large remittances from workers abroad contributed to current account surpluses in Bangladesh. The country also maintained rapid growth in both exports and imports in 2007. Workers’ remittances rose to nearly $6 billion, and in 2007 Bangladesh exceeded slightly its 2006 current account surplus of about 1% of GDP.
Fiscal deficit and public debt sustainability in South Asia
- Despite improvements in recent years, public debt remains a serious problem for most countries in South Asia. While domestic public debt is becoming a larger component of total public debt, it has received relatively less attention despite its serious economic and social implications.
- Excessive reliance on debt, whether domestic or external, carries macroeconomic risks that can hinder economic and social development. High domestic public debt pushes up interest rates and crowds out private investment, which is much needed to promote economic growth. When most government revenues are devoted to debt servicing, fiscal policy cannot be used to provide basic services, such as education, health, safe drinking water and housing.
- In Bangladesh, public debt has stabilized below 50% of GDP in recent years, estimated at 47% in 2006. The real burden of public debt is in its servicing. In Bangladesh, interest payments alone consumed about 18% of government revenues in 2006, more if repayments of principal are included.
- There are some lessons that policymakers would find useful in their efforts to contain public debt. The sustainability of debt is crucially dependent on the size of the economy. Therefore, policies promoting GDP growth should be vigorously pursued.
- As budget deficits are a major cause of public debt, every effort should be made to maintain a primary surplus in the budget. The pace of government revenue growth through the strengthening of tax administration and broadening of the tax base must continue to rise so that the country’s debt-carrying capacity can increase.
- Strengthening tax administration is crucial. Tax rates are not low in South Asia, but inefficient tax systems and corruption keep revenues low. A simpler tax system, with fewer exemptions, less discretion and better compliance, should be a focus.
- Widespread poverty and lack of basic services mean that demand for public spending is high. The challenge for governments is to contain wasteful public spending and orient it towards priority sectors. Public expenditure should promote pro-poor growth; basic services, such as education, health, sanitation and housing, should be a priority.
Addressing the neglect of agriculture – two-pronged approach needed
- The rural poor account for around 70% of the poor in the Asia-Pacific region, and agriculture is their main livelihood. Another worrisome trend is the widening gap between the rich and the poor because the benefits of growth are not shared equally by different sectors, regions or income groups.
- Agriculture appears neglected, even though it still provides jobs for 60% of the working population and generates about a quarter of the region’s GDP. Growth and productivity in agriculture are slowing, and the green revolution has bypassed millions. In South Asia, growth in agriculture output dropped from 3.6% in the 1980s to 3.0 per cent in 2000-2003.
- Agricultural labour productivity has a significant impact on poverty reduction. ESCAP estimates show that a 1% increase in agricultural productivity would lead to a 0.37 drop in poverty in the Asia-Pacific region. Given the large agriculture productivity gaps among countries in the region, the potential gains appear substantial.
- Raising the region’s average agricultural productivity to Thailand’s level can take 218 million people out of poverty, roughly a third of total poor in the region. Large gains in poverty are also possible through comprehensive liberalization of global agriculture trade, which could lift another 48 million people out of poverty in the region.
- Therefore, a policy priority should be to revitalize agriculture. Revitalizing agriculture requires connecting the poor to markets by improving rural infrastructure, improving availability and management of water, improving agricultural technology, increasing the capacity to adapt technologies, and speeding diversification and commercialization. It also requires improving the distribution of land and the access to agricultural credit and extension - and making macroeconomic policy friendlier to agriculture, all enabling the poor to make a dent on poverty by themselves.
- While agriculture growth will help in reducing poverty particularly in rural areas, yet some poor will shift from agriculture to industry and services, which offer them a better chance of escaping poverty. Policies should be put in place to make this transformation easy. Therefore, transition from agriculture should complement agricultural productivity improvement – by empowering the poor, particularly women, with the skills to tap labour market opportunities and by promoting rural non-farm activities and regional growth centres.