Restoring business confidence 'a challenge to sustaining growth'
Tuesday, 27 November 2007
FE Report
Singling out the restoration of business confidence as a "challenge" to sustaining private sector-led growth, the Asian Development Bank (ADB) said Monday the Bangladesh economy, impacted by the floods and cyclone Sidr, could grow by a below 6.0 per cent band in the current fiscal.
The Bank noted in its Bangladesh Quarterly Update (September 2007) that the restoration of business confidence as a "challenge" to sustaining private sector-led growth.
"GDP growth is expected to be below 6.0 per cent in the fiscal 2008, compared with 6.5 per cent during the previous year, because of extensive flooding and cyclone, and a slowdown in external demand for garments," Hua Du, the bank's country director, said at the launching of the update.
She also pointed out Bangladesh is going to face such a "difficult challenge" in its history, given the devastating floods and cyclone, and rocketing oil and commodity prices in the international market.
"The ADB official expressed the view that the government's renewed stance on targeted anti-graft drive will help regain business confidence.
She suggested a series of steps, including the formation of Better Business Forum, Regulatory Reform Commission, and a Truth Commission, to restore the confidence of the business community.
While presenting the economic update, Rezaul Karim Khan, the bank's lead economist, said that the extensive anti-corruption drive and eviction of illegal businesses caused some fear and uncertainty among the businesses and investor class.
The uncertainty also dampened new investment as suggested by a sharp decline in number of projects and investments registered with the Board of Investment.
"Entrepreneurs are reluctant to risk new ventures in the changed environment," Khan told the press briefing.
But Hua Du seemed to be optimistic about the country's growth potential, saying a huge post-cyclone recovery programme should contribute to higher growth.
"The economic prospects will depend on post-flood and post-cyclone rehabilitation, recovery of the garment sector, and political stability in the lead-up to the general elections scheduled for the end of 2008," she told a news briefing in the city.
She said the ADB will extend US$ 180 million in emergency cyclone assistance to help Bangladesh recover from the savage storm that struck the country's southwest coastal district in mid-November.
Of the total aid package, the Manila-based lender will give $60 million in "highly concessional" loan while rest will come from a number of donor nations, including Japan, Sweden, the Netherlands, and Canada as grants, she told the FE.
"We're currently working out the details of the post-cyclone recovery project. The loan proposal is likely to be placed before our board sometime in January," she told newsmen.
Responding to a question as to whether the Manila-based lending agency would look into the possibility of a temporary moratorium on Bangladesh's debt repayment in view of the economic challenges, Hua Du said she will take the issue up with the bank's top bosses.
"It (moratorium on debt repayment) depends on the government position … But we share the concern and will pass on the message on to our headquarters," she said.
Asked how the government could deal with fuel and fertiliser subsidies in view of the devastating cyclone, local head of the Asian lender said that the "most pressing priority" was the post-cyclone recovery, not handling subsidy issues.
She also denied that her organisation is mounting pressure on the government to raise fuel and fertiliser prices, rather than asking Bangladeshi policymakers to find a strategic way-out of the contentious subsidy issue.
In reply to another question, Hua Du pointed out the government is tackling the energy subsidy matter in a "practical" manner.
In terms of agriculture growth, the ADB update said it is likely to moderate in FY08 because of serious flooding during July-September of 2007 and a devastating cyclone in mid-November.
It noted that the floods and cyclone caused extensive damage to the agriculture sector by affecting crops, livestock, poultry and aquaculture.
Production loss because of flooding is estimated at 1.3 million tonnes, while the severe cyclone damaged 38 per cent of aman planted areas in the coastal districts, it noted.
The ADB report warned that the effect of this year's flooding and cyclone on agriculture sector could be "substantial" unless the losses are offset by a bumper boro crop.
During the last fiscal (FY07), the ADB report pointed out the industry sector recorded robust growth of 9.5 per cent, driven by a steady expansion in export-oriented manufacturing and a rise in domestic demand.
But the first quarter data of FY 2008 indicates a slowdown in export-oriented manufacturing because of a drop in external demand.
The country's key export-oriented garments industry, experienced robust performance over past years, showed downtrends during recent months.
Construction has decreased because of the anti-corruption drives and increased prices of construction materials.
Similarly, a slump is evident in services sector which grew by a strong 6.7 per cent in the preceding year, said the report. But a turnaround in economic activity is expected in the second half of FY2008, it added.
Turning to the revenue performance, the ADB said although the collection improved, the challenges in fiscal management remain.
"The losses of state-owned enterprises (SOEs) and associated quasi-fiscal obligations pose a significant fiscal risk. Administrative prices of fuel, electricity, and fertiliser cause much of the SOEs losses," it maintained.
Growth in private sector credit slowed because of uncertainty and poor business confidence rather than tightening of monetary policy.
"The growth in net credit to the government slowed with the steady rise in revenue collection. But the growth in credit to other public sector enterprises increased sharply caused by a rise in bank borrowing by SOEs," according to the report.
Exports increased in September 2007 after a setback during July-August 2007. But exports in July-September FY2008 fell by 5.4 per cent compared with the corresponding period of preceding year, driven by downtrend in two major exports, woven garments and knitwear.
Based on opening of letters of credit (L/C) during July-September FY2008, imports also rose by 26 per cent over the corresponding period of the previous year.
Imports of food grains, intermediate goods, and industrial raw materials increased significantly.
Despite an increase in workers' remittances, the surge in the trade deficit mounted pressures on the current account.
The ADB feels that the workers' remittances should continue to provide a cushion to the external balance in Bangladesh.
In September, on a point-to-point basis, inflation remained high at 9.6 per cent.
Rezaul Karim Khan said the rise in international commodity prices, domestic food grain shortfall, and the drive against corruption and hoarding amplified price pressures, but he suggested no policy measures needed to keep the inflationary pressure under check.
Singling out the restoration of business confidence as a "challenge" to sustaining private sector-led growth, the Asian Development Bank (ADB) said Monday the Bangladesh economy, impacted by the floods and cyclone Sidr, could grow by a below 6.0 per cent band in the current fiscal.
The Bank noted in its Bangladesh Quarterly Update (September 2007) that the restoration of business confidence as a "challenge" to sustaining private sector-led growth.
"GDP growth is expected to be below 6.0 per cent in the fiscal 2008, compared with 6.5 per cent during the previous year, because of extensive flooding and cyclone, and a slowdown in external demand for garments," Hua Du, the bank's country director, said at the launching of the update.
She also pointed out Bangladesh is going to face such a "difficult challenge" in its history, given the devastating floods and cyclone, and rocketing oil and commodity prices in the international market.
"The ADB official expressed the view that the government's renewed stance on targeted anti-graft drive will help regain business confidence.
She suggested a series of steps, including the formation of Better Business Forum, Regulatory Reform Commission, and a Truth Commission, to restore the confidence of the business community.
While presenting the economic update, Rezaul Karim Khan, the bank's lead economist, said that the extensive anti-corruption drive and eviction of illegal businesses caused some fear and uncertainty among the businesses and investor class.
The uncertainty also dampened new investment as suggested by a sharp decline in number of projects and investments registered with the Board of Investment.
"Entrepreneurs are reluctant to risk new ventures in the changed environment," Khan told the press briefing.
But Hua Du seemed to be optimistic about the country's growth potential, saying a huge post-cyclone recovery programme should contribute to higher growth.
"The economic prospects will depend on post-flood and post-cyclone rehabilitation, recovery of the garment sector, and political stability in the lead-up to the general elections scheduled for the end of 2008," she told a news briefing in the city.
She said the ADB will extend US$ 180 million in emergency cyclone assistance to help Bangladesh recover from the savage storm that struck the country's southwest coastal district in mid-November.
Of the total aid package, the Manila-based lender will give $60 million in "highly concessional" loan while rest will come from a number of donor nations, including Japan, Sweden, the Netherlands, and Canada as grants, she told the FE.
"We're currently working out the details of the post-cyclone recovery project. The loan proposal is likely to be placed before our board sometime in January," she told newsmen.
Responding to a question as to whether the Manila-based lending agency would look into the possibility of a temporary moratorium on Bangladesh's debt repayment in view of the economic challenges, Hua Du said she will take the issue up with the bank's top bosses.
"It (moratorium on debt repayment) depends on the government position … But we share the concern and will pass on the message on to our headquarters," she said.
Asked how the government could deal with fuel and fertiliser subsidies in view of the devastating cyclone, local head of the Asian lender said that the "most pressing priority" was the post-cyclone recovery, not handling subsidy issues.
She also denied that her organisation is mounting pressure on the government to raise fuel and fertiliser prices, rather than asking Bangladeshi policymakers to find a strategic way-out of the contentious subsidy issue.
In reply to another question, Hua Du pointed out the government is tackling the energy subsidy matter in a "practical" manner.
In terms of agriculture growth, the ADB update said it is likely to moderate in FY08 because of serious flooding during July-September of 2007 and a devastating cyclone in mid-November.
It noted that the floods and cyclone caused extensive damage to the agriculture sector by affecting crops, livestock, poultry and aquaculture.
Production loss because of flooding is estimated at 1.3 million tonnes, while the severe cyclone damaged 38 per cent of aman planted areas in the coastal districts, it noted.
The ADB report warned that the effect of this year's flooding and cyclone on agriculture sector could be "substantial" unless the losses are offset by a bumper boro crop.
During the last fiscal (FY07), the ADB report pointed out the industry sector recorded robust growth of 9.5 per cent, driven by a steady expansion in export-oriented manufacturing and a rise in domestic demand.
But the first quarter data of FY 2008 indicates a slowdown in export-oriented manufacturing because of a drop in external demand.
The country's key export-oriented garments industry, experienced robust performance over past years, showed downtrends during recent months.
Construction has decreased because of the anti-corruption drives and increased prices of construction materials.
Similarly, a slump is evident in services sector which grew by a strong 6.7 per cent in the preceding year, said the report. But a turnaround in economic activity is expected in the second half of FY2008, it added.
Turning to the revenue performance, the ADB said although the collection improved, the challenges in fiscal management remain.
"The losses of state-owned enterprises (SOEs) and associated quasi-fiscal obligations pose a significant fiscal risk. Administrative prices of fuel, electricity, and fertiliser cause much of the SOEs losses," it maintained.
Growth in private sector credit slowed because of uncertainty and poor business confidence rather than tightening of monetary policy.
"The growth in net credit to the government slowed with the steady rise in revenue collection. But the growth in credit to other public sector enterprises increased sharply caused by a rise in bank borrowing by SOEs," according to the report.
Exports increased in September 2007 after a setback during July-August 2007. But exports in July-September FY2008 fell by 5.4 per cent compared with the corresponding period of preceding year, driven by downtrend in two major exports, woven garments and knitwear.
Based on opening of letters of credit (L/C) during July-September FY2008, imports also rose by 26 per cent over the corresponding period of the previous year.
Imports of food grains, intermediate goods, and industrial raw materials increased significantly.
Despite an increase in workers' remittances, the surge in the trade deficit mounted pressures on the current account.
The ADB feels that the workers' remittances should continue to provide a cushion to the external balance in Bangladesh.
In September, on a point-to-point basis, inflation remained high at 9.6 per cent.
Rezaul Karim Khan said the rise in international commodity prices, domestic food grain shortfall, and the drive against corruption and hoarding amplified price pressures, but he suggested no policy measures needed to keep the inflationary pressure under check.