ADB for tight monetary policy to tame inflation

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FE Report
The Asian Development Bank (ADB) Tuesday suggested that Bangladesh increase the bank interest rate and take a tight monetary policy to tame the inflationary pressure on the economy.
"If you continue the accommodative monetary policy the inflation could go up and the economy might suffer setback," said the head of country programming of ADB Zahid Hossain Tuesday.
"Substantial risks are involved in the supply-side approach to stabilising the economy as its first-round effects of expanding credit without a quick or substantial supply response could trigger higher inflation," he said while presenting the "Asian Development Outlook 2008 Update" in the city.
Apart from Dhaka, the updated version of the outlook was simultaneously launched in 44 ADB-operated countries in the Asia-Pacific region Tuesday.
Newly appointed Country Director of the ADB Dhaka mission Paul J. Heytens and other officials of the donor agency were present on the occasion.
Mr Hossain also hinted at readjustment of the domestic oil prices following the downward price trend in the global market for controlling further inflation in the country.
"The average inflation in FY09 could be 9.0 per cent from earlier projected 8.0 per cent in the Asian Development Outlook 2008. The projection takes into account the likely effects of the July 2008 domestic oil price rise but assumes no further price adjustment," he said.
Before launching the updated version of the development outlook Tuesday, the Manila-based lending agency launched another outlook titled "Asian Development Outlook 2008" in April last.
The updated outlook forecast the gross domestic product (GDP) growth of Bangladesh at 6.5 per cent in the financial year (FY)2009.
It also projected a upward growth in agriculture sector to 4.0 per cent in FY09 from 3.6 per cent in FY08 assuming normal weather, farmers responding to higher market and government procurement prices, and supply of different inputs, credit and extension services.
The report said: "The industry is expected to pick up with further strengthening in business confidence, moving back toward the higher growth path seen in the years from FY05 to FY07."
"In FY09, the industry is expected to post 7.9 per cent growth, reflecting higher growth in export-oriented manufacturing such as garments and textile, expansion in small and medium enterprises and light engineering, and in relatively new sectors such as shipbuilding," the outlook said.
"The services are forecast to grow by 6.8 per cent in FY09, slightly faster than in FY08, in step with the pick-up in agriculture and manufacturing," it said.
The ADB outlook forecast a decline in revenue growth to 11.1 per cent of GDP in current fiscal from 11.2 per cent in FY08, as new tax incentives offset the intensified collection efforts begun in FY08.
"Reaching the FY09 revenue income target will likely be a challenge, partly because several contributors to the jump in FY08 revenue collection, such as taxing legally earned undisclosed income and special drives for collecting income tax and arrears, could be of a one-time nature," the outlook quoted.
The updated report said imports are expected to grow by 21 per cent with higher bills for oil, foodgrain and other raw materials, while exports are expected to grow by 16.5 per cent mainly owing to stronger growth in knitwear and garments.
"Although the US safeguard quota on the China is set to expire at the end of this year, the appreciating yuan and the China's move out of the low-end of the garment market could allow fast export growth for Bangladesh given its sound track record in this market segment," it said.
"The larger trade deficit is expected to be offset by higher remittances, resulting in a continued moderate current account surplus of 0.5 per cent of GDP," the report said.
About the ailing energy sector the ADB outlook said power shortage has increasingly blocked industrial expansion and therefore the country crucially needs a large expansion in generation capacity, as well as an upgrading of transmission and distribution networks.
The report further said several risks facing the economic outlook could undermine the projections, including higher-than-assumed oil and commodity prices, a budget revenue shortfall, lack of supply response by farmers, and greater-than-expected shortages in power and gas.