Bangladesh’s economy in 2012: wide range of risks & pressures to face

Dec 30, 2011

Bangladesh’s economy next year will continue to face wide range of risks & pressures

Bangladesh’s economy in 2011 faced wide range of risks and pressures, including soaring inflation, hefty bank borrowings, rise in government subsidies and a fall in foreign aid, which may harden the macro economic management of the country in the next year.

The economy in the outgoing calendar year also witnessed a fall in the private sector credit flow, depreciation of Taka against dollar, high import growth except capital machineries and raw materials, low foreign aid disbursement and current account balance deficit, and these are unlikely to be solved very quickly, said two noted economists Dr Mirza Azizul Islam and Dr Salehuddin Ahmed while talking to UNB.

Former finance adviser in the last caretaker government Mirza Azizul Islam said that the economy in the outgoing calendar year (2011) faced several risks – foremost being inflation that remained in double digit for the last couple of months. He apprehended that inflation may continue to be in the double digit for the rest of the current fiscal year (2011-12).

Country’s point-to-point inflation rate increased by 0.16 percentage point to 11.58 in November compared to the previous month, mostly due to price-hike of fuel oil, according to Bangladesh Bureau of Statistics (BBS). The point-to- point inflation rate was 11.42 percent in October.

Apart from inflation, Mirza Azizul Islam said that there were some other concerns for the country’s economy like high bank borrowings by the government that already exceeded the target of the current fiscal by November.

He said the government bank borrowings in the last fiscal year (2010-11) also exceeded the year’s target by 25 percent of which a major chunk came from the central bank that put pressure on inflation.

The former finance adviser said there were also liquidity crisis and high call money rates that put hindrances to trade and investment. Depreciation of Taka against dollar had also pushed up the production cost.

“The risks that the economy is currently facing do not bear a positive sign for the next year,” he said, adding that there were, however, some success stories for the government in the agricultural sector – thanks to the continuation of good crops production over the last few years.

On power situation, Mirza Aziz said that there was partial success in the outgoing year as the intensity of load shedding had reduced. “But, high cost solutions to rental power plants increased imports of diesel and furnace oil.”

To overcome the challenges that the economy is likely to face in next year (2012), he stressed the need for taking some unpopular decisions by the government including that of taking austerity measures.

He said that new government appointments would have to be stopped along with reduction of subsidies, especially in the loss making state-owned enterprises (SOEs).

On the progress of implementation of the Annual Development Programme (ADP), Mirza Aziz opined that there is further scope to improve.

Mentioning that the government would not be able to utilize the Tk 46,000 crore ADP envisaged for fiscal 2011-12, he said that the government would have to prioritize the development projects before giving approval.

On the growth projection of 7 percent for the current fiscal, he categorically said it would not be achievable; it may at best reach 6.2 to 6.5 percent.

On the capital market scenario, Mirza Aziz, also a former chairman of the Securities and Exchange Commission (SEC), said that the key indexes in both the bourses – Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE) – witnessed severe falls throughout the year with continuous volatility.

Former Bangladesh Bank Governor Dr Salehuddin Ahmed attached highest importance on political stability, saying that otherwise it would be very tough for the policymakers to maintain good macro economic management in 2012.

He said that the government would have to improve its economic management, and take decisions quickly and implement those swiftly.

“It will be of no use in the next year, if the government takes some erroneous policies and spends time like it did in 2011,” he said adding that there should not be any political influence in decision-making for the sake of the economy.

Despite various pressures both from the internal and external sectors, the former central bank governor thinks that the macro economic fundamentals of the country is still strong though there was not much improvement in the macro economic management over the last one year.

Dr Salehuddin Ahmed, however, said that the outgoing year witnessed severe lack of coordination on various issues among the Ministry of Finance, Ministry of Commerce and Bangladesh Bank.

On the growth projection which has recently been turned into an issue of hot discussions, he was not optimistic about achieving 7 percent growth rate.

“It will be good for the country if 7 percent growth can be achieved. But I won’t worry, if 6.5 percent growth is achieved; it will be enough if there is real growth in productive sectors,”

The former BB governor said that the outgoing year began with uncertainty in the capital market, coupled with some other domestic and external shocks.

“We’re still facing the pressure of inflation both in food and non-food items along with excessive bank borrowings, liquidity crisis, stagnation in investment so also in employment generation, and volatility in foreign exchange market.”

Besides, he said there will be another challenge for the government: removing regional disparities and income discrimination.

He also acknowledged the performance of the agricultural sector in the outgoing year as “more or less good” apart from the vegetable producers who were deprived of fair prices for their produce due to lapses in the marketing system.

Citing the present crisis in the Euro Zone, Dr. Salehuddin feared there might be some impact of this in the country’s export earnings, especially of RMG in the months to come.

Besides, he said there were low remittance inflows with low disbursement of foreign aid that ultimately put pressure on the Balance of Payment (BoP) situation.

In the outgoing year, Bangladesh received only US$5 million in net foreign aid in the last five months (July-November) compared to $250 million during the same period last year.

Besides, increased imports of fuel and fertilizer that see rise in prices on the international market have pushed up the government’s subsidy burden, according to Finance Ministry sources.

It prompted the government to borrow more money from banks, especially the central bank, since the start of the current fiscal year. This has caused the inflation to go up.

Bangladesh Bank statistics say opening of L/C for capital machinery and raw materials fell by 34 percent and 0.46 percent respectively in the last four months of the current fiscal year.

The country’s average monthly imports skyrocketed to nearly $3 billion during the first four months of the current fiscal year as the import bill payment in the period amounted to $11.75 billion compared to $9.56 billion in the corresponding period of the last fiscal year.

The country’s import payment in FY11 was nearly $32 billion, posting a 35 percent rise year-on-year, mainly because of oil import to feed the fuel-guzzling quick rental power plants.

The government borrowing from the banking system, however, has recently fell to some extent following the repayment of a considerable amount of debt to the Bangladesh Bank, said officials at the central bank.

Earlier, the government’s borrowing from the banking system during the July-November period of the current fiscal year had exceeded the total borrowing target of Tk 189.57 billion, set for the entire fiscal year 2011-12.

Its borrowing from the banking sources reached Tk 198.05 billion as on November 30, 2011, according to the central bank statistics.

In the outgoing year, a major reason behind the galloping inflation rate was the depreciation of local currency against the dollar. On December 21, the inter-bank exchange rate crossed Tk 81 with a 15 percent increase since last year.

The value of Taka, which fell by over 15 percent during the outgoing calendar year (2011), was another threat to the economy as it had inflated the cost of imported goods having a knock-on-effect at the consumers’ level.

UNB

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