Bangladesh: Bangladesh Economy Profile 2012
Bangladesh Economy Profile 2012
Bangladesh Business Estimate Statement 2012
We continue to believe that the Bangladeshi economy will face a cyclical slowdown in the current fiscal time(FY 2011/12, July-June) as significantly tighter credit conditions keep a lid on economic activity. We are currently pencilling in a slowdown to 5.9% (from 6.7% in FY 2010/11).
Apart from government spending, we expect amount components of GDP to undergo some semblance of moderation. Broadly speaking, the economy is expected to slow on domestic and external fronts. The country's current account balance looks set to return to deficit territory after years in surplus. Coupled with insufficient remittance inflows, weakening export increase should see the balance record a deficit of US $1.3bn (or 1.1% of GDP) in FY 2011/12, down from US $1.0bn in FY 2010/11.
In terms of monetary policy, we continue to hold to our view that Bangladesh Bank will pause on further rate hikes, despite the fact that consumer price inflation has been additional sticky than we before estimate.
Major Estimate Changes
We downgraded our FY 2011/12 real GDP increase estimate from 6.3% to 5.9%, owing mainly to a downgrade of our private consumption outlook from 6.0% to 4.5%.
Our before expectations were for a marginal widening of the current account surplus this fiscal year. However, on the back of downward revisions to our export and remittance increase outlooks, we now see the current account balance heading back into deficit territory.
Key Risks To Outlook
Downside Risks To Increase: We highlight that risks to our interest rate forecasts are heavily weighted to the upside. Hence, our 5.9% outlook on increase may face further downside revision.
Upside Risks To Interest Rate Outlook: As mentioned above, risks to our outlook are heavily weighted to the upside. At such elevated levels, the central bank will continue to face pressure to curb seemingly runaway inflation. Furthermore, Bangladesh Bank's continuing pursuit of the government's impossible goal of 7.5% average inflation could mean additional hikes in the near term. From the perspective of exchange rate stability, a hike could help stem the ongoing weakness of the Bangladeshi taka. We further highlight that the bank's real repurchase rate remains deep within negative territory, suggesting further scope for additional hikes.
Looking ahead, real GDP increase for Bangladesh is currently projected by the IMF at 6.3 % in FY12, driven by still-strong garment exports, a firming up of remittances inflows, and better electricity supply. The headline inflation rate is projected approaching down modestly by end-fiscal year, mainly due to additional moderate expected increases in world commodity prices. Bangladesh should remain fairly insulated from a world increase slowdown. Still, BOP pressures are likely to intensify over the near to medium term because of rising oil import volumes and import-intensive infrastructure investment.
During the mission, discussions focused on the policy framework and structural reforms needed to ensure in general macroeconomic stability and lay the conditions for higher economic increase. The broad targets set forth in the government’s FY12 budget and BB’s July 2011 Monetary Policy Statement provide solid anchors. However, the mission stressed that achieving these targets in FY12 will require better coordination of fiscal and monetary policies. It noted that the balance of macroeconomic and financial risks could necessitate further policy adjustments in order to contain external inclunding fiscal pressures and to avoid crowding out private investment.
On fiscal policy and debt management, the mission welcomed the NBR’s evolution on improving tax government, which is contributing to major revenue increases. It stressed that tax policy reforms, led by timely passage of near-finalized price added tax (VAT) and direct tax laws, provide a critical anchor to tax modernization plans under formulation by the NBR. However, the mission as well highlighted the pressing need to contain subsidy costs, as their rapid rise threatens to eat away the fiscal space being created by a larger tax take and needed for social and development spending. It urged the Ministry of Finance (MoF) to move forward on public financial management reform, focusing its priorities on strengthening budget accountability and transparency and cash and debt management. The mission cautioned that increased reliance on domestic budgetary financing, including from BB, threatens to undermine macroeconomic stability and necessitates better interest rate flexibility to ensure a well-functioning Treasury bill and bond market. On external debt, primary reliance on concessional borrowing is expected, in line with the debt management strategy being prepared by the MoF.
Regarding monetary, exchange rate, and financial sector policies, the mission noted the monetary tightening measures taken by BB, but cautioned that still-high credit expansion may require further policy actions. Better exchange rate flexibility has helped absorb external pressures and deepen the interbank foreign exchange market. The mission recommended that BB move to a additional risk-based supervisory framework for banks. Strengthening banks’ internal governance is seen as a complementary step toward ensuring their financial soundness. In this context, the mission noted the need for national-owned commercial banks to be allowed to operate with minimal outside interference and under BB’s sole jurisdiction, consistent with their before corporatization. In view of recent stock market volatility, the mission looked forward to timely enactment of measures aimed at helping banks properly manage market exposure and urged a further strengthening in securities market oversight to protect investor interests.
Most of the mills and factories are concentrated in the cities of Dhaka and Chittagong. A lot of basic consumer goods are made in homes and small shops.
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