FE Report
The Asian Development Bank (ADB) has further cut Bangladesh's economic growth projection to 5.6 per cent taking the declining remittance inflow and the possible downtrend in export earnings in the months to come into consideration.
Earlier in October last year, the Manila-based lender in its Asian Development Outlook (ADO) 2013 Update said that Bangladesh's gross domestic product (GDP) would expand at the rate of 5.8 per cent in the current financial year 2013-14 to July next.
"Domestic demand was depressed in the first half of the year, because the prolonged political unrest ahead of parliamentary elections in January 2014 dented consumer and investor confidence," said the ADB's ADO 2014, released Tuesday across the globe.
"This is reflected in lower private credit growth, a decline in import of consumer goods and capital machinery, and modest growth in imports of raw materials," said Mohammad Zahid Hossain, Principal Country Economist at the ADB Dhaka office while analysing the outlook.
The ADB, however, said the growth was expected to rebound to 6.2 per cent in FY 2015, aided by higher remittance and export growth, as well as by prospects for continued economic recovery in the US and the euro zone.
Mr Hossain said: "A likely rise in consumer and investor confidence as the political situation stabilises is also expected to stimulate demand and strengthen growth momentum."
The government of Bangladesh has targeted a growth of 7.2 per cent in GDP in the current FY 2013-14.
Mr Hossain said investments in infrastructure, skill development and political stability were the major challenges for the country to take its economy to the expected growth trajectory.
The ADB outlook has identified some risks to the economic growth in Bangladesh including possible political unrest, poor revenue collection and any unfavourable weather condition.
The ADB outlook said: "Bangladesh needs to boost investment in infrastructure and skills development to raise the economy's productive capacity, if it hopes to upgrade economic growth to a 7-8 per cent trajectory."
"Investment has remained virtually stagnant at around 25-26 per cent of GDP over the past several years and needs to be raised to the range of 32-33 per cent, as envisaged in the Sixth Five-Year Plan FY2011-FY2015."
Little scope existed for raising GDP growth without stoking inflation, unless potential GDP was bolstered through higher investment, the Manila-based lender in its outlook said.
The ADB also said: "Clearly, more public resources should be mobilised to ?nance large infrastructure investment requirements in power, gas, ports, railways, roads, and urban services, and to enhance the skill base to strengthen the garment industry, help diversify the economy and raise global competitiveness and growth.
"Bangladesh needs to raise its tax-GDP ratio through tax measures that include axing exemptions and exclusions, and through improved tax administration achieved by simplifying laws and procedures, improving logistics and automation, and reducing scope for evasion with the introduction of advanced auditing and enforcement techniques," it said.
"Moreover, ?scal space needs to be expanded by cutting subsidies, which requires raising electricity prices to re?ect the cost of production vis-à-vis other options, and by aligning fuel prices with international oil prices."
"Gas prices need to be set keeping in view gas prices on the international market and the cost of alternative fuels. The resources freed up could be allocated for infrastructure and human resource development," the Bank's ADO said.
Projects under public-private partnerships (PPP) needed to be advanced by developing the capacity in line agencies to design, bid, and award such contracts, it observed.
Banks are the main ?nancing source for private investment.
Weak governance in state-owned commercial banks undermined their strength and efficiency, it said adding that in line with the latest memorandum of understanding between these banks and the central bank, performance was to be improved by adopting stronger risk management and controls, and by placing ceilings on credit growth for each bank based on its performance and ?nancial soundness.
The ongoing capital market reforms to enhance market stability and governance needed to be deepened, including through development of a liquid bond market, to expand sources for private sector ?nancing, the ADO said.
The ADB outlook suggested that the trade regime be liberalised through tariff and non-tariff reform to improve the business climate. "Import duties need to be cut, and the dispersion in rates and average level of protection lowered to boost competitiveness and reduce biases against exports."
The bank said trade infrastructure and logistics, including port services and automation, also needed to be improved to lower transaction costs and facilitate faster clearance of goods.
About Bangladesh's economic prospect, the ADB ADO 2014 said the forecasts for FY2014 and FY2015 rested on several assumptions: Political stability should be restored following the January 2014 national elections apart from improving consumer and investor con?dence.
The ADB has given bad news for the country's industrial sector as its outlook said industrial growth was expected to slow to 8.0 per cent in FY2014 compared to 9.0 per cent achieved last fiscal because of the output lost to political unrest in the first half of the fiscal and a weaker domestic demand depressing production.
It has, however, projected higher agriculture growth in the current FY2014 expecting a good weather as it will expand at a rate of 3.0 per cent in the FY2014, aided by favourable weather conditions in the early months of the year and reflecting the previous year's low base.
The ADO has also projected a slower growth in the service sector to 5.4 per cent from the 5.7 per cent, achieved in the last FY2013 due to lost sales during the pre-election unrest and slower industrial activity.
The principal economist of the ADB Mr Hossain said Bangladesh had good prospects but it had to improve its infrastructure, business climate and easy regulatory frameworks.
The ADO update has also projected the inflation at 7.5 per cent in the current FY 2014.
"In?ation is expected to rise to average 7.5 per cent in FY2014 because of the effects of supply disruptions, rising wages in both public and private sectors and expected increases in electricity and fuel prices," the outlook said.
ADB Deputy Country Director in Bangladesh Oleg Tonkonojenkov said financial sector reforms would need to be deepened to enhance the depth and efficiency in the banking sector and for developing the capital market as a source of long-term infrastructure financing.
He said Bangladesh needed to attach higher priority to enhancing its business climate, improving infrastructure and trade logistics, and addressing the shortage of skills to grow more rapidly.