Higher demand, rising prices of essentials fuel inflation: ADB
Wednesday, 1 August 2007
FE Report
The Asian Development Bank (ADB) has said a strong domestic demand, aided by higher incomes and continued high monetary and credit growth, has contributed to rising inflation.
In an economic update released Tuesday, the bank also took note of the issue of rocketing food and commodity prices in the international market in fuelling inflationary pressures in the economy.
"We feel that rising inflation is the outcome of a combination of demand and cost factors," the bank's country director Hua Du told a press briefing.
On a point-to-point basis, inflation climbed up to 8.1 per cent in May 2007, from 5.9 per cent in January 2007.
Food inflation swelled from 6.7 per cent to 8.4 per cent, and non-food inflation increased from 5.0 per cent to 7.8 per cent.
"The rising domestic demand pressures aided by higher incomes and continued high monetary and credit growth mainly fuelled inflationary pressures," the ADB's chief economist Rezaul Karim Khan said while presenting the quarterly economic update in the city.
"As domestic prices are increasingly linked to international prices due to globalisation, the increase in international food and commodity prices also aided inflation," he maintained.
The Centre for Policy Dialogue (CPD), a local think-tank, recently made an analysis of the current inflation, saying it is pushed by cost, not demand-driven.
But Hua Du disagreed with the CPD assessment, saying her bank would facilitate a debate in the future on what factors contributed to inflationary pressures.
In his intervention, her colleague Rezaul Karim Khan noted that inflation could be reined in subjected to coping with risks associated with looming floods and higher domestic demand.
The lending agency, however, insisted that the administrative measures taken by the caretaker administration had not succeeded in taming inflation.
Inflationary pressures steadily mounted from the beginning of this decade from 1.9 per cent in fiscal year (FY) 2001 to 2.8 per cent in FY 2002, 4.4 per cent in FY 2003, 5.8 per cent in FY 2004, 6.5 per cent in FY 2005, and 7.2 per cent in FY 2006.
Buttressing his arguments, the ADB economist noted as the GDP growth remained stable with a rising trend during the period, domestic supply-side developments are unlikely to have put any major pressure on prices.
In addition, he added, the surge in exports and remittances that pushed up the growth of net foreign assets to 39.2 per cent with a share of 25.4 per cent in broad money growth in May 2007 contributed to inflation in the just-concluded fiscal.
The Manila-based multilateral capital lender pointed out that taming of prevailing inflationary trend is "more of a demand management exercise, and requires cautious monetary policy."
"Bangladesh Bank's monetary programme to contain annual average inflation within 6.5 per cent-7.0 per cent for FY 2008 appears well-advised," the economic update maintained.
Turning to the economic growth prospect, Khan said that Bangladesh economy could grow by 7.0 per cent in the current fiscal, provided the apparel sector maintained its exports momentum, investment picked up and private sector was buoyant.
Responding to a question, Hua Du agreed that the current anti-graft drive might deliver "undesired results" causing panic among the business community, but the country would benefit from less corruption and improved governance in the long run.
"It (anti-graft drive) should be targeted," the ADB executive, who is leading the country team, quipped without elaborating.
The GDP (gross domestic product) growth is estimated at 6.5 per cent in the just-concluded fiscal (2006-07), slightly lower than 6.6 per cent in FY2006, thanks to moderate growth of agriculture.
"Growth was underpinned by steady expansion in manufacturing and continued buoyancy in services. Private consumption was the main driver of growth, bolstered by strong remittance inflows," observed the ADB report.
At 24.3 per cent of GDP, investment during FY2007 was lower than 24.7 per cent in the preceding year caused a decline in public investment, while private investment rose modestly.
Showing an upsurge in remittance inflows, gross national savings in FY2007 increased sharply to 29.2 per cent of GDP.
The bank expressed the hope Bangladesh holds "strong potential" for higher GDP growth of 7.0 per cent-8.0 per cent over the medium term.
But the ADB listed a flurry of risks that could affect growth prospects and those risks included political uncertainty, infrastructure constraints, vulnerability of the garment sector to intensified global competition and flooding.
Bangladesh needs to upgrade infrastructure and extend a more supportive environment for new and existing FDI.
"The country has not yet decided on several large FDI proposals amounting to $11 billion in important sectors, including energy, steel, fertiliser, tourism, and petrochemical," it said, adding long delays may drive investors to other countries.
On agriculture, the update said the growth in the sector during FY2007 is estimated at 3.2 per cent, lower than the post-flood high growth of 4.9 per cent in FY2006.
Although growth in crops and animal farming sub-sectors slowed, growth in forest and fisheries sub-sectors rose compared with that of the preceding year, but the avian flu outbreak in the country affected the output of animal farming, according to the June update.
About balance of payments (BoP), the ADB said the rising trade deficit was more than offset by the surge in workers' remittances, showing a surplus of $468 million in the current account balance.
Based on the latest BoP data, the current account surplus in FY2007 is estimated at 0.7 per cent of GDP compared with 0.9 per cent of GDP in the preceding year.
Foreign exchange reserves stood at $5,077 million on June 30, 2007, an increase of $1,593 million from the end of June 2006.
Similarly, exports (16-5 per cent) and imports (17.4 per cent) grew strongly during the first 11 months of FY2007.
While broad money growth reached a record 22 per cent in December 2006, growth in broad money decreased after March 2007, reaching 18.3 per cent in May 2007, mainly because of better control in monetary management.
Supporting the Bangladesh Bank's monetary policy, Rezaul Karim said: "The fourth half-yearly monetary policy statement of the central bank aims to continue the cautious monetary policy stance keeping in view the prevailing price situation and excess liquidity in the banking system, while supporting sustainable output growth."
The growth rate of manufacturing sector (11.2 per cent), driven by that of readymade garments (RMG), was higher than 10.8 per cent in the preceding year.
Industrial growth during the last fiscal is estimated at 9.5 per cent compared with 9.7 per cent in FY2006.
The ADB pointed out revenue collection fell short of projection in FY2007. Despite an increase in current expenditures, overall expenditures were contained by decreasing development spending.
The Asian Development Bank (ADB) has said a strong domestic demand, aided by higher incomes and continued high monetary and credit growth, has contributed to rising inflation.
In an economic update released Tuesday, the bank also took note of the issue of rocketing food and commodity prices in the international market in fuelling inflationary pressures in the economy.
"We feel that rising inflation is the outcome of a combination of demand and cost factors," the bank's country director Hua Du told a press briefing.
On a point-to-point basis, inflation climbed up to 8.1 per cent in May 2007, from 5.9 per cent in January 2007.
Food inflation swelled from 6.7 per cent to 8.4 per cent, and non-food inflation increased from 5.0 per cent to 7.8 per cent.
"The rising domestic demand pressures aided by higher incomes and continued high monetary and credit growth mainly fuelled inflationary pressures," the ADB's chief economist Rezaul Karim Khan said while presenting the quarterly economic update in the city.
"As domestic prices are increasingly linked to international prices due to globalisation, the increase in international food and commodity prices also aided inflation," he maintained.
The Centre for Policy Dialogue (CPD), a local think-tank, recently made an analysis of the current inflation, saying it is pushed by cost, not demand-driven.
But Hua Du disagreed with the CPD assessment, saying her bank would facilitate a debate in the future on what factors contributed to inflationary pressures.
In his intervention, her colleague Rezaul Karim Khan noted that inflation could be reined in subjected to coping with risks associated with looming floods and higher domestic demand.
The lending agency, however, insisted that the administrative measures taken by the caretaker administration had not succeeded in taming inflation.
Inflationary pressures steadily mounted from the beginning of this decade from 1.9 per cent in fiscal year (FY) 2001 to 2.8 per cent in FY 2002, 4.4 per cent in FY 2003, 5.8 per cent in FY 2004, 6.5 per cent in FY 2005, and 7.2 per cent in FY 2006.
Buttressing his arguments, the ADB economist noted as the GDP growth remained stable with a rising trend during the period, domestic supply-side developments are unlikely to have put any major pressure on prices.
In addition, he added, the surge in exports and remittances that pushed up the growth of net foreign assets to 39.2 per cent with a share of 25.4 per cent in broad money growth in May 2007 contributed to inflation in the just-concluded fiscal.
The Manila-based multilateral capital lender pointed out that taming of prevailing inflationary trend is "more of a demand management exercise, and requires cautious monetary policy."
"Bangladesh Bank's monetary programme to contain annual average inflation within 6.5 per cent-7.0 per cent for FY 2008 appears well-advised," the economic update maintained.
Turning to the economic growth prospect, Khan said that Bangladesh economy could grow by 7.0 per cent in the current fiscal, provided the apparel sector maintained its exports momentum, investment picked up and private sector was buoyant.
Responding to a question, Hua Du agreed that the current anti-graft drive might deliver "undesired results" causing panic among the business community, but the country would benefit from less corruption and improved governance in the long run.
"It (anti-graft drive) should be targeted," the ADB executive, who is leading the country team, quipped without elaborating.
The GDP (gross domestic product) growth is estimated at 6.5 per cent in the just-concluded fiscal (2006-07), slightly lower than 6.6 per cent in FY2006, thanks to moderate growth of agriculture.
"Growth was underpinned by steady expansion in manufacturing and continued buoyancy in services. Private consumption was the main driver of growth, bolstered by strong remittance inflows," observed the ADB report.
At 24.3 per cent of GDP, investment during FY2007 was lower than 24.7 per cent in the preceding year caused a decline in public investment, while private investment rose modestly.
Showing an upsurge in remittance inflows, gross national savings in FY2007 increased sharply to 29.2 per cent of GDP.
The bank expressed the hope Bangladesh holds "strong potential" for higher GDP growth of 7.0 per cent-8.0 per cent over the medium term.
But the ADB listed a flurry of risks that could affect growth prospects and those risks included political uncertainty, infrastructure constraints, vulnerability of the garment sector to intensified global competition and flooding.
Bangladesh needs to upgrade infrastructure and extend a more supportive environment for new and existing FDI.
"The country has not yet decided on several large FDI proposals amounting to $11 billion in important sectors, including energy, steel, fertiliser, tourism, and petrochemical," it said, adding long delays may drive investors to other countries.
On agriculture, the update said the growth in the sector during FY2007 is estimated at 3.2 per cent, lower than the post-flood high growth of 4.9 per cent in FY2006.
Although growth in crops and animal farming sub-sectors slowed, growth in forest and fisheries sub-sectors rose compared with that of the preceding year, but the avian flu outbreak in the country affected the output of animal farming, according to the June update.
About balance of payments (BoP), the ADB said the rising trade deficit was more than offset by the surge in workers' remittances, showing a surplus of $468 million in the current account balance.
Based on the latest BoP data, the current account surplus in FY2007 is estimated at 0.7 per cent of GDP compared with 0.9 per cent of GDP in the preceding year.
Foreign exchange reserves stood at $5,077 million on June 30, 2007, an increase of $1,593 million from the end of June 2006.
Similarly, exports (16-5 per cent) and imports (17.4 per cent) grew strongly during the first 11 months of FY2007.
While broad money growth reached a record 22 per cent in December 2006, growth in broad money decreased after March 2007, reaching 18.3 per cent in May 2007, mainly because of better control in monetary management.
Supporting the Bangladesh Bank's monetary policy, Rezaul Karim said: "The fourth half-yearly monetary policy statement of the central bank aims to continue the cautious monetary policy stance keeping in view the prevailing price situation and excess liquidity in the banking system, while supporting sustainable output growth."
The growth rate of manufacturing sector (11.2 per cent), driven by that of readymade garments (RMG), was higher than 10.8 per cent in the preceding year.
Industrial growth during the last fiscal is estimated at 9.5 per cent compared with 9.7 per cent in FY2006.
The ADB pointed out revenue collection fell short of projection in FY2007. Despite an increase in current expenditures, overall expenditures were contained by decreasing development spending.