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State of the Bangladesh Economy in Fy06: Early Signals and Immediate Outlook

Debapriya Bhattacharya
Executive Director
Centre for Policy Dialogue (CPD) House No 40/C, Road No 11 (new) Dhanmondi R/A, Dhaka-1209 Bangladesh

Abstract/ Executive Summary:

This report has been prepared as part of CPD’s ongoing assessment of the macro-economic performance of Bangladesh under CPD’s programme titled Independent Review of Bangladesh’s Development (IRBD). Based on data and information on the dynamics of major macroeconomic variables during July-December 2005, the analysis attempts to trace and track the movements of key macroeconomic performance indicators including in such areas as: public finance, monetary and financial sector, real economy and external balance. The discussion is contextualized by recalling the initial conditions of FY06 and budgetary measures envisaged to deal with the macroeconomic challenges of FY06. In presenting the analysis of some of the recent trends in the economy the review takes note of the robust trends in terms of private sector investment, good prospects of food grain production, moderate growth of exports and buoyant flow of remittances. However, in the absence significant rise in the net flow of foreign aid and mobilization of domestic resources, the report apprehends that quality of fiscal balance may deteriorate further in the coming months. The report points out that without augmentation of foreign aid flow, high export growth and sustained remittance flow the external balance may experience severe pressure in the second half of the fiscal year. The report highlights some of the emerging trends in the economy which may frustrate the overall economic growth prospect and undercut macroeconomic stability during the period of electoral transition. The interim IRBD 2006 report presents elements of a plausible scenario in view of the emerging situation. Thus the government is likely to accelerate its spending in the coming months under both revenue and ADP accounts. There is a possibility of a slowdown in the private sector investment as well. The report makes a number of suggestions to address the policy challenges emanating from rising inflation, high-interest rate, dwindling reserves and deteriorating balance of payment (BOP).

Keywords: FY06, Poverty Reduction Strategy, PRS, GOB, Floods

Location: In Bangladesh

Start Date: 00-07-2005

End Date: 00-12-2005

Program Area: Socio-economic and Policy

Commodity: Poverty, Labor

Objectives:

To assess the performance of FY06 in the context of operationalization of the Poverty Reduction Strategy (PRS) by the Government of Bangladesh (GOB).

Methodology:

The Bangladesh economy experienced a respectable growth rate of about 5.3 percent during FY05 in spite of having to struggle with two exogenous shocks, i.e. floods of 2004 and phasing-out of apparel quota from 1 January 2005. There is usually a complementary relation between the decreasing share of agriculture and the increasing share of the industry sector in any transitional developing economy. However, the space left behind by the agriculture sector was not adequately picked up by the manufacturing sector in Bangladesh. Instead, the share of construction and supplies of gas, water and electricity doubled (from 5.2% in FY80 to 10.3% in FY05) over the last two and half-decade. As a result, the contribution of real economic sectors kept falling over the period. Since half of the GDP is attributable to the service sector, a moderate expansion of this sector can regularly post a respectable GDP growth rate notwithstanding a stagnant real economic sector growth. CPD estimates suggest that, even though the real economic sectors (agriculture, manufacturing, mining & quarrying) remain stagnant at the level of FY05, the overall GDP will grow by an average 3.7 percent in FY06. And if the real economy manages to grow by only 1 percent, the overall GDP growth will not be less than 4 percent. In other words, it seems that the current structure of the national income accounts is such that, under normal circumstances, Bangladesh will never achieve a less than 4 percent growth. Moreover, a modest growth of the real economic sectors will catapult the growth rate beyond 5 percent regularly. In other words, while analyzing the GDP, one will have to focus unwillingly on the growth of the real economic activities such as agriculture and manufacturing instead of the GSP growth rate per se. Since FY06 is the first year for implementation of the Poverty Reduction Strategy (PRS) in Bangladesh, obviously the major targets set in the PRS will be the most important performance indicators of the current fiscal year. The analytical part of the PRS document provides a set of policy guidelines and offers some measurable indicators to assess the “pro-poor” attributes of economic performance. From a wide range of macro and micro-level monitoring indicators, we have selected eight crucial promises of PRS to assess the performance of FY06. Interestingly, other than the Ministry of Agriculture which implemented only 12 percent of its ADP, most of the ministries which developed their own budget under the Medium Term Budgetary Framework (MTBF) of the PRSP, demonstrated modest performance during the reporting period. Ministry of Education, Ministry of Social Welfare, and the Ministry of Women and Children Affairs implemented 23 percent, 16 percent and 26 percent of their respective ADP allocations.

Source of Information: CPD Occasional Paper Series 55, January 2006, ISSN 1818-1570

Article Link (Online Journal):

Funding Source:

Budget:

Total Budget (Tk.) :

Achievement/Findings:

The report highlights some of the emerging trends in the economy which may frustrate the overall economic growth prospect and undercut macroeconomic stability during the period of electoral transition. The interim IRBD 2006 report presents elements of a plausible scenario in view of the emerging situation. Thus the government is likely to accelerate its spending in the coming months under both revenue and ADP accounts. There is a possibility of a slowdown in the private sector investment as well. The report makes a number of suggestions to address the policy challenges emanating from rising inflation, high-interest rate, dwindling reserves and a deteriorating balance of payment (BOP). However, agriculture credit disbursement by the NCBs and specialised banks and government-supported micro-finance programmes may experience some increase.

Knowledge Management: Journal