Country's economic outlook for FY2014 remains subdued due to decline in remittances and weak domestic demand due to prolonged unrest ahead of the national election held on January 5 last, Asian Development Bank (ADB) said Wednesday.
"In FY2014, economic growth will mostly rely on exports and domestic absorption. But consumers and investors have adopted a cautious approach given the unrest during the past months," the bank said in its quarterly economic update.
The quarterly report said although the decline in remittance inflows, consumption will be partly stabilized by higher minimum wages for industrial workers announced in November 2013 and a 20 per cent rise in civil servants' allowances.
The ADB forecasted a stagnant private investment scenario in Bangladesh due to confidence crisis stemmed from pre-election unrest.
"The slowdown in private sector credit, decrease in industrial term loans, lower import of capital machinery, and rise in excess liquidity in the banking system point to lower private investment performance in FY2014," the report said.
About excess liquidity in the banking system the report said it has increased because of lower investment demand created by pre-election unrest.
It termed the fiscal policy stance as pragmatic because the bank said the government expanded the fiscal space through tax policy and tax administration reforms, increased public spending on infrastructure, decreased subsidies, and stepped up social spending.
The quarterly report forecasted a slight fall in current account surplus as the bank said imports rose due to food-grain imports, together with negative growth in remittances.
The ADB identified reviving economic activities and restoring consumer and investor confidence after the national election is the major economic challenge.
"Re-emergence of unrest will directly affect investment, growth and poverty reduction," it said.
It apprehended that inflation may resurge due to supply disruptions and cost-push factors, including wage increases.
The ADB quarterly report warned that a decrease in growth will affect employment creation for the annual incremental labour force of 1.8 million, which in turn will exacerbate economic and social problems.
It also estimated that fiscal space will be reduced causing higher bank borrowing to finance the fiscal deficit.
"Financial intermediation, which has been badly affected by inefficiency and lack of discipline, will continue to weaken if political unrest re-emerges," the report further said.
The report mentioned transition of the country's RMG industry, especially after the Savar tragedy, to meet demands for internationally accepted safety and labour standards as another major challenge.
It said successful transition of the RMG industry will require investment in enterprises, complementary public investment in infrastructure, and capacity building related to compliance and safety standards.
The transition will increase operating costs, which may reduce the industry's traditional price competitiveness, it also forecasted.
"The immediate challenge is to restore buyer confidence, which has been seriously undermined by recurrent industrial accidents during the past 2 years, causing a shift of some buyers to invest in comparator countries like Cambodia, India, Sri Lanka, and Viet Nam," the quarterly said.
It further warned that if the EU withdraws Generalised System of Preferences (GSP) like USA it will significantly affect exports from the RMG industry and impact Bangladesh's macroeconomic stability, economic growth, and poverty reduction.
The ADB said identifying new growth drivers over the medium term through diversification of export base is another major challenge.
"This will require expanding electricity, gas, transport services, skills, FDI inflow, and an enabling investment climate," the ADB said.
Simultaneously, the government needs to push structural reforms forward, such as trade liberalisation, an efficient market-based pricing mechanism for electricity, energy, and other public utilities, revenue reform and capital market reforms, it said.
Addressing the electricity shortage, the ADB identifies it as a major challenge as about half of the country's population does not have access to electricity, and many of those only receive intermittent supply.
