::: New Year Special :::

Economic Review 2010

Sajjadur Rahman

2010 was the year of the bounce for the global economy as well as for Bangladesh. Despite energy and infrastructure shortages most of the economic indicators showed positive trend throughout the year except some volatility in the money and capital markets and inflation at the end.

The economy managed to achieve a 5.8 percent growth during fiscal 2009-10 ended on June 30, well above the pessimistic 5.5 percent or even lower growth projection made by donor agencies.

Government has targeted a 6.7 percent GDP growth for the present fiscal (FY11), and if the economic performance observed in the third and fourth quarters of 2010 can be sustained, the projected growth target should not be difficult to achieve, observed Metropolitan Chamber of Commerce and Industry (MCCI), a leading business body in its latest quarterly analysis.

But sustaining this recovery over the medium term will require addressing the bottlenecks in the supply systems. Domestic demand will continue to play a major role in sustaining growth over the medium term and one of the major bottlenecks is the infrastructure constraints that persist strongly despite the present government's two years in power.

High rate of inflation continues to be another central policy concern. Although various social safety net programmes do exist, the impact of high inflation rate is far reaching. Though the favourable monsoon is expected to bring some relief on the price front, it is not happening.

In this review of the economy we present the major trends and patterns of variables in the major sectors of the economy. We begin with an assessment of the overall macroeconomic scenario for 2010. The production trends in agriculture, industry and services are analysed. The money and finance section presents a review of the main monetary aggregates and prices in the financial and capital markets. The external trade and public finances are also reviewed.

Agriculture grew strongly with continued government support, which encouraged favourable supply responses. Industry sector growth declined because of a fall in external demand and a shortage of power, energy and transportation facilities. The services sector growth increased marginally. Bangladesh faces the challenges of maintaining food security for its large population, manage the effects of climate change, create job opportunities for a growing labor force and attain higher economic growth to reduce poverty.

Agriculture
Agriculture sector grew by 4.7 percent in FY2010 up from 4.1 percent in FY2009. Favorable weather conditions along with broad-based government support are the major contributing factors. Crops and horticulture sub-sector grew by 5.1 percent compared with 4 percent in FY2009. Other sub-sectors such as poultry, livestock, and fisheries performed well because of rising demand and growing adoption of better technology.

Industry
Industry sector growth was 6 percent in FY2010 down from 6.5 percent in FY2009. Growth in manufacturing was lower at 5.7 percent compared with 6.7 percent in FY2009. Lower industry growth was caused by the combined impact of lower growth in export industries, which account for more than one third of the industrial value added and several supply side bottlenecks, especially arising out of the shortages in power, energy and transportation. But it is nice to see export has bounced back in the third quarter of 2010.

Services
Growth in services sector slightly rose to 6.4 percent in FY2010 from 6.3 percent in FY2009. In the first half of FY2010, lower industry sector growth, particularly related to exports, and compression of domestic demand due to slowdown in remittance inflows affected services sector growth, especially transport and financial services. However, several compensating factors such as higher agriculture growth, pick up in imports and continued expansion of telecommunications, health and education services aided satisfactory services sector growth.

Inflation
After moderating at the beginning of FY2011 from the rising trend observed in the previous year, year-on-year inflation has been rising again, reaching 7.6 percent in September 2010 up from 4.6 percent in September 2009. According to Asian Development Bank, the steady growth in money supply over the past years appears to be the key-contributing factor for the rising inflationary trends. In addition, the effects of natural calamities on crop production in large producing countries created volatility in food stocks in the international market, leading to supply disruptions and pushing up prices.

Fiscal Management
Tax revenue collection under the National Board of Revenue (NBR), which accounts for over 95 percent of total tax revenue, has grown robustly by 25.7 percent during the first four months (July-Oct) of FY2011, over the corresponding period of last year. The strong revenue performance is attributed to expansion of domestic economic activities, broadening of the tax base, better compliance aided by tax reforms and publicity campaign, and commitment of the NBR officials.

Total public expenditure has grown from 14.3 percent of GDP in FY2009 to 16 percent in FY2010. While current expenditure has risen from 9.9 percent of GDP in FY2009 to 10.1 percent in FY2010. Annual Development Programme has grown from 3.2 percent of GDP in FY2009 to 4.1 percent in FY2010, but its implementation still remains low.

Monetary and Financial Sector Developments
Broad money (M2) grew by 22.9 percent year-on-year in August 2010, higher than the 19.2 percent growth in August 2009, and also significantly higher than the annual broad money growth target of 15.2 percent in FY2011. The higher than target growth was caused by the high growth of private sector credit. The high growth of credit to agriculture and small and medium enterprises was also a factor. In consequence, domestic credit experienced a high growth of 20.2 percent in August 2010. The growth in net foreign assets softened, although high at 28.7 percent in August 2010 resulting from the large purchase of foreign exchange by Bangladesh Bank from the inter-bank market.

Net credit to the government declined by 2.5 percent in August 2010, significantly down from 18.4 percent growth in August 2009, as the higher revenue growth reduced the need for public sector borrowing. Reserve money grew by 19.8 percent year-on-year in August 2010 because of a sharp rise in net foreign assets of Bangladesh Bank.

External Trade
Export growth rate accelerated during the current fiscal year. Exports grew by 35.8 percent to $8.27 billion during July-Nov of FY11 compared to the same period of the previous year. Exports of woven garments, knitwear, jute goods, frozen food and leather grew during the period. Regarding imports, the trend was equally positive. Import growth was also over 35 percent higher compared to the same period of FY10. This increase was mainly due to the increase in import of consumer goods, mostly food grains and industrial raw materials.

Remittance
Reduced construction works in the gulf countries may leave impact on the remittance earned by Bangladesh. Manpower export from Bangladesh has experienced a significant fall because of worldwide economic recession since September 2008, thus scaling down the remittance inflow. The country received $10 billion in remittance during the first 11 months of 2010 against nearly $11 billion in 2009.

Capital Market
Capital market was a money making place since second week of December. Huge flow of investors made the market volatile, as the supply of stocks was not at par with the demand. More than 15 lakh beneficiary owners' accounts were opened in 2010 to take the total accounts to 32 lakhs. Both index and market capitalization has been almost doubled in 2010 compared to a year ago. On Dec 5 this year index reached its peak to 8,918 points, which were 4,535 points a year ago. Market capitalization also increased to Tk 3.68 lakh crore compared to Tk 1.98 lakh crore in December 2009. General index in Dhaka Stock Exchange witnessed record fall of 551 points on December 19 causing an outburst of investors on the streets.

Balance of Payments
Trade deficit widened to $1.3 billion during JulySeptember of 2010, up from $739 million during the year earlier period because of the higher growth in imports compared with the growth in exports. With the higher deficit in trade and services and decline in remittances, the current account surplus also reduced to $635 million during July-September of 2010, down from $1.4 billion in the corresponding period of 2009. The combined capital and financial accounts recorded a deficit of $646 million against the surplus of $258 million during the year earlier period because of the large outflows on account of trade credit. Consequently, the overall balance of payments turned into a deficit (-$426 million) in July-September of 2010, sharply lower than the surplus of $1.3 billion during the corresponding period of 2009.

Exchange Rates
The weighted average nominal (takadollar) exchange rate has remained mostly stable between Tk69.4:$1 to Tk70.7:$1 (a modest depreciation of 1.9 percent) during the first four months of FY2011, reflecting the country's healthy foreign exchange reserve position.

Forecast and challenges for 2011
The overall assessment of the economic activity reviewed in 2010 indicate that the economy has performed reasonably well in the last two quarters of 2010, even though the performance of different sectors and sub-sectors has remained mixed. The overall investment scenario still remains depressed but the situation is steadily improving. Investment is coming up in the power and electricity sector.

“While there are some definite signs of improvement, the actual increase in investment would depend on how effectively the government could ease the constraints to investment growth, including the shortage of power and electricity,” MCCI said in its analysis. The acceleration of growth set at 6.7 percent for the present fiscal year, would depend upon the success in raising investment especially in the private sector. Raising public investment through improved implementation of the ADP and success in rapidly institutionalizing the PPP efforts, especially in the infrastructure sector, will be important in crowding-in private investment.

“Our economy has more potential to grow than the government set its target on. We are competing with Indian and Chinese entrepreneurs and in many cases we have won,” said a leading entrepreneur whose group's combined annual turnover is over Tk 6,300 crore.

Adequate energy, infrastructure and conducive business environment could cause the GDP to rise up its growth rate by another 2-3 percentage points, he said.

Sajjadur Rahman is a senior business correspondent of The Daily Star.