Poor infrastructure, power shortage major hurdles to growth: MCCI

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FE Report The Metropolitan Chamber of Commerce and Industry (MCCI) has identified poor physical infrastructure and power shortage as "major constraints" to export and economic growth of the country. The Chamber also pinpointed the current pressure on balance of payments (BoP), higher bank borrowing by the government, stagnant investment, stock market crisis, and the double-digit inflation as other major bottlenecks to attaining the targeted 7.0 GDP growth this year. "Political stability, maintenance of smooth supply of gas and electricity, and infrastructural development are important factors that will influence foreigners' decision to invest in the country," the MCCI said Wednesday in its quarterly review (July-September 2011 (Q1 of FY1 2) on economic situation in Bangladesh. The MCCI said 8.0 per cent growth would also be difficult for the country to achieve in the next fiscal, though the economy performed reasonably well during July-September of the current fiscal year. It said despite achieving quite sizable additional generation capacity and a fair amount of increase in power production, the situation did not improve much in Q1 of FY12. "Shortage of energy, in fact, now poses the biggest threat to Bangladesh's economic growth. The present demand for electricity is 6,500 megawatt (mw), while actual generation varies between 4,800 mw and 5,000 mw," the review said. The Chamber said currently the estimated demand supply gap is thus 1,500 mw in peak hours. Gas shortage accounts for at least half of this gap. It said the ultimate solution of the power sector problems lies in the establishment of large coal-based power plants, which will use the country's own coal resources. This in turn will require a quick finalisation of the long-pending coal policy. The review said the country has achieved 22.5 per cent growth in export in Q1 of FY12. "Much of the export growth can be attributed to buyers' shifting of imports from China and South Korea to Bangladesh. According to a primary estimate by EPB, the overall export earning in the first three months of the fiscal was US$6,164 million, compared to US$5,031 million in the same period of the previous year," it added. The MCCI review said the overall imports grew by nearly 22 per cent in the first two months of FY12 mainly due to higher import of petroleum products besides capital machinery and intermediate goods. "Fuel oils import increased by 130.49 per cent to US$815.50 million during the period against US$353.82 million of the corresponding period of the previous fiscal," it mentioned and added that import of capital machinery, industrial equipment used in production, rose by 44.23 per cent to US$404.72 million during the period against US$280.61 million of the corresponding period of FY11. Regarding remittance, the review said the Bangladeshis working abroad remitted US$2,937 million in the Q1 of FY12, which was 10.5 per cent higher than the corresponding period of previous fiscal. With regard to the present stock market situation the review said the country's capital market continues to be in a state of uncertainty. "Nearly a year has elapsed since the collapse of the market after an unprecedented bull run but there is little sign of its recovery," it said. "The inflation rate continued to rise, mainly because of the rise in food inflation. The point-to-point inflation rose to 11.97 per cent at the end of September, 2011. The point-to-point inflation was 7.61 per cent a year earlier (in September, 2010)," the review said. Regarding Monetary and Credit Developments On July 27, 2011, the Bangladesh Bank (BB) unveiled its half-yearly monetary policy statement (IVIPS) for July-December 2011, on the basis of which BB will continue its tighter monetary policy stance to rein in credit expansion (to control inflation) and preserve external sector balance. "Total liquid assets of scheduled banks stood at less than Tk 97,796 crore as of end August, 2011, against Tk 100,566 crore as of end June, 2011. Excess liquidity of scheduled banks also stood at Tk 28,719 crore as of end August, 2011, against Tk 34,071 crore as of end June, 2011, " the MCCI said. The MCCI review said that a significant increase in SME loans over the past five quarters as evident from Bangladesh Bank (BB) data indicates that production in SMEs has been on the rise. It said the construction sector expanded by 6.4 per cent during FY11, facilitated by the high growth in the production of cement and the import of construction materials. The increase in public sector rehabilitation of roads and highways in Q1 of FY12 indicates that construction activities have been growing faster than in the past fiscal. "The construction in the housing sector, however, continues to be at a disadvantageous position because of the shortage of power and gas. In fact the sale of land and apartments has dropped significantly due to the lack of new electricity and gas connections to residential and commercial projects and the increase in land transfer costs," the review added. "Continuation of agricultural subsidies and ensuring their proper utilization, and encouraging farmers to grow more profitable crops as an alternative to only rice cropping patterns would significantly contribute to enhancing productivity, production and value added in agriculture," the review said. "The overall foodgrain production in FY11 is estimated at 34.4 mmt which is 3.77 per cent higher than the actual production of 33.15 mmt during the previous year," it said. On foodgrain import the MCCI said in FY12, government has a target to import 1.7 mmt of foodgrain, of which 0.8 mmt is rice and 0.9 mmt is wheat. The MCCI in its review said that according to the Directorate General of Food, as of September 22, 2011, the public foodgrain stock stood at 1.40 mmt comprising rice of 1.14 mmt and wheat 0.26 mmt. The MCCI said the domestic market prices of rice and wheat registered a slight increase during Q1 of FY12. The MCCI review said that the growth rate of the services sector rose slightly to 6.6 per cent in FY11 from 6.5 per cent in FY10. "Much faster growth can be expected in the present fiscal if production in real sectors increases at a greater pace. As of now, most service sector activities such as hospitals, IT, travel agencies, education, social work, transport, storage & communication, wholesale & retail trade, hotels & restaurants, and telecommunications are performing well.," it added. The MCCI said the Bangladesh Bank employs repo, reverse repo, and BB bill rates as policy instruments for influencing financial and real sector prices toward the targeted path of inflation. "In a bid to tackle inflation by decreasing the money supply, BB increased the repo rate and reverse repo rate by 50 basis points on September 04, 2011 to 7.25 per cent and 5.25 per cent from the preexisting 6.75 per cent and 4.75 per cent, respectively. It is the second time in FY12 that BB has raised its policy rates. The first one was effected in August, 2011, also by 50 basis point," it said.. The review said since September, 2010, scheduled banks systematically raised both their deposit and lending interest rates. About Industrial Term Loan the review said data on industrial term loans are not available for Q1 of FY12. According to BB data, the disbursement of industrial term loans during FY1 1 increased by over 31 per cent to Tk 32,163 crore from Tk.24,488 crore during the corresponding period of the previous fiscal year. The MCCI review said, the BB announced an agriculture credit policy with a disbursement target of Tk 13,800 crore for FY12, projecting 9.52 per cent growth over that of the previous fiscal. On public finance, the MCCI said the government has set a target to collect Tk 91,870 crore from the NBR sources in FY12.