Inflation stabilisation a key challenge for policymakers

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FE Report
The Bangladesh Bank (BB) has identified the inflationary flare-up as one of critical downside risks facing the economy in the near future and warned that the Cyclone Sidr could dampen economic prospects.
However, the central bank maintains that economic activities will pick up steam when reform measures are "successfully implemented". It has also projected economic growth between 6.2 and 6.5 per cent in the current fiscal (FY08).
"Stabilising the inflation rate is a major challenge for the policy makers because a low and stable rate of inflation is critical for accelerating economic growth and poverty reduction," said the annual report of the BB for the fiscal 2006-07, released Wednesday.
"Apart from the downside risks, economic prospects in the near and medium term are likely to be affected by the repeated floods and Cyclone Sidr in the first half of the financial year," the report added.
Annual average consumer price index (base FY96) inflation as of end June 2007 was 7.20 per cent, compared to 7.16 per cent as of end June 2006, according to the central bank figures.
The BB report stressed that inflationary pressure was not a phenomenon unique to Bangladesh, rather all other south Asian countries had also been experiencing the same--mainly because of rising world commodity prices, notably food and fuel oil.
It also said production losses due to natural calamities have added to the inflationary flare-up.
"The sustained high global oil prices have heightened pressure on country's balance of payments, threatened fiscal and monetary stability alongside adversely affecting the economic activity," the report noted.
In this regard, the BB report recommended automatic adjustment of domestic fuel prices to international market prices, while keeping the hardships of the poor in mind.
"Although the rapid actions to anti-corruption and anti-hoarding drive are causing interruptions to some extent in the business activities, the central bank report noted that economic activities will further gear up when the ongoing reform programmes are successfully implemented," noted the report.
During FY07 (July 2006-June 2007), the report pointed out, the Bangladesh economy maintained a strong growth, despite disruptions in the domestic supply chains like political turmoil in the first half of FY07, dislocation of market structure following anti-hoarding drive, crackdown on corrupt business houses and lower growth of crop production.
"The growth of the economy was mainly underpinned by robust growth in services and notable expansion in manufacturing activities," the report pointed out.
The report said the government and the central bank continue to adopt policies to support economic activities to the highest sustainable level while keeping inflation at a tolerable level.
"These policies contributed toward a strong real GDP growth of 6.5 percent in FY07, slightly lower than 6.6 percent of FY06," according to the report.
The annual average inflation increased marginally to 7.20 per cent in June 2007 from 7.16 per cent in June 2006, while 12-month consumer price inflation on point to point basis increased over the same period to 9.20 per cent.
Broad money (M2) grew by 17.1 per cent in FY07, which was lower than the 19.3 per cent growth recorded in FY06 but higher than the projection of 14.7 per cent growth.
Total domestic credit grew by 14.5 per cent, while credit to private sector increased by 15.1 per cent in FY07.
The external sector witnessed a strong performance in FY07 with robust growth both in exports and imports, and increased inflow of workers' remittances from abroad.
In US dollar terms, export earnings recorded a growth of 15.8 per cent, while the growth of import payments remained to a sustainable level at 16.6 per cent.
At the same time, remittances from non-resident Bangladesh nationals increased substantially by 24.5 per cent. The country's external current account balance continued to record a significant surplus with a substantial increase in remittances more than offsetting trade deficit and services deficit.
The 6.5 per cent real GDP growth in FY07 was underpinned, on the supply side, by a robust growth in the industry sector and continued strong growth in the services sector, offsetting lower growth in agriculture sector.
Growth rate in the agriculture sector achieved a moderate growth of 3.2 per cent in FY07, resulting mainly from a lower growth in crops and horticulture sub-sector.
The industry sector attained robust growth of 9.5 per cent in FY07, slightly lower than 9.7 percent of FY06.
"The growth was supported mainly by a continued improved performance in manufacturing sub-sector, facilitated by strong and sustained growth in export-oriented manufacturing activity and expansion in domestic demand," the BB said in its annual report.
Overall the services sector surged by 6.7 per cent in FY07, higher than 6.4 per cent recorded in the last fiscal year, the report said.
Meanwhile, the central bank has continued to pursue a cautious monetary policy stance during FY07 with a view to keeping inflationary pressure under control while supporting the targeted real GDP growth.
In line with this policy stance, an upward bias in the policy interest rate and reintroduction of BB bills in October 2006 succeeded in limiting inflation around the targeted level up to January 2007.
However, the report maintained, cautious monetary policy stance along with additional measures taken by the government continued to dampen the inflationary pressure.
Besides, repo and reverse repo interest rates, treasury bill/bond yield rates were maintained on sustained uptrend during the year in an attempt to slowdown credit growth.
Exports and imports achieved robust and reasonable growth in FY07, and remittances from workers abroad showed a strong and steady growth.
Exports increased by 15.8 per cent from US$ 10,412 million in FY06 to US$12,053 million-in FY07 and remittances from workers abroad recorded 24.5 per cent growth from US$ 4,802 million in FY06 to US$ 5,979 million in FY07, while imports went up by 16.6 per cent from US$ 13,301 million in FY06 to US$ 15,511 million in FY07.
The report maintained the overall balance of payments recorded a significant surplus of US$ 1,493 million in FY07, which was much higher than surplus of US$ 338 million of FY06, reflecting a notable improvement in current account balance and a larger surplus in the financial account.
Gross foreign exchange reserves held by the central bank increased by US$ 1,593 million to US$ 5,077 million at the end of FY07 from US$ 3,484 million at the end of FY06, about 3.9 months of import cover.
The BB report projected that the inflation rate could decline from 6.5 per cent in the current fiscal to 5.0 per cent in FY 10, with an appropriately cautious monetary policy stance towards maintaining price stability coupled with the support of prudent fiscal and trade policies.
In view of the growth supportive policy stance with maintaining a target CPI inflation, it added that broad money (M2) growth is projected to slowdown gradually over the years from 15.0 per cent in FY08 to 13.0 per cent in FY10.