In its latest semi-annual economic update, the World Bank projects that GDP growth in Bangladesh will be around 6.2 percent in FY11, driven mainly by export growth and domestic demand. The World Bank also says that the growth outlook for FY12 is good, provided some short-term risks are contained. These include rising global food and fuel prices, deteriorating remittances, an increased reserve drawdown, a growing quasi-fiscal deficit, stock market volatility and its potential impact on the banking sector.
There are no major supply-demand imbalances in food grain stocks at the aggregate level and the recent increases in food prices have been driven mainly by the upward trend in international prices, said the report. This needs to be carefully managed as the it is the poor who gets most affected by high and volatile food price.
The rise in food and fuel prices, together with a worsening trade balance and falling remittances have weakened the external position. Both exports and imports rose in the first part of FY11, while remittances growth fell sharply. The slowdown in the growth rate for remittances is largely because of a significant decrease in the net outflow of migrant workers over the past year and a half, the report added. Rising food and oil imports have intensified the pressures on the external current account. If these trends continue through the fiscal year, the current account balance is likely to go from a surplus to deficit in FY11. The projected overall balance of payments deficit is likely to be financed by drawing down reserves, says the World Bank report.
Rising energy and food subsidies are placing a strain on the budget, but higher-than-anticipated revenues and lower-than-budgeted Annual Development Program expenditures will leave sufficient fiscal space for the government to react to these pressures.
The report also takes stock of progress on reforms in the recent past. “The advances made on Value Added Tax reforms are laudable, and efforts are also being made to tighten liquidity and set up a framework for public-private partnership projects. However, there are concerns on proposed amendments relating to telecommunication policy, the Anticorruption Commission, and policy responses to stock market volatility”, said Sanjay Kathuria, World Bank Lead Country Economist for Bangladesh.
According to the report, the high broad money growth may have been a factor in the stock price surge that built up after July 2009. The regulator’s efforts to deal with the price surge and the subsequent reversal of these policies may have increased volatility in the stock index in the past few months.
“The developments in the stock market could potentially affect the banking sector through the commercial banks’ exposure to the stock market as well as exposure of Investment Corporation of Bangladesh, the state-owned banks and financial institutions,” said Zahid Hussain, World Bank Senior Economist for Bangladesh.
GDP growth is projected to be about 6.4 percent in FY12, assuming that short-term risks are prudently managed. “In addition, alleviating power shortages, raising public investment and removing bottlenecks for private investment are critical to ensure long-term sustainable growth,” said Lalita Moorty, World Bank Senior Country Economist for Bangladesh.