Macroeconomic assessment of Fy2008 -Fy2010 In Bangladesh Salahuddin Ahmad,Phd

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1 Macroeconomic assessment of Fy2008 -Fy2010 In Bangladesh Salahuddin Ahmad,Phd With continued economic growth Bangladesh Economy has established itself on solid foundation During last five years this continued growth has led to attainment of GDP growth above 6% There is satisfactory growth in export-import, continued flow of remittance, favorable current account balance has stabilized the situation.bangladesh s growth performance has been acknowledged by Asian Development Bank and it has been included as one of the world wide thirteen growing countries. Despite such performance Bangladesh has been adversely affected by financial crisis originated in the developed countries. Export was also affected by the global recession titled as US subprime crisis. The crisis burst in August 2007.This problem led to the shifting of orders for Bangladeshi Garment industry to other countries. This was due to decline in the consumer expenditure in the countries with which Bangladesh trades. Exports of other sectors such as leather, handicraft etc has been adversely affected. Export growth has been declining continuously since 3 rd quarter. In order to cope with the global recession efforts are being made to diversify the products and export destinations. Manpower export from Bangladesh has been falling. This is because in importer countries of manpower, employment has been falling due to recession, also wages have been falling. As a result, manpower export has been falling. However, remittances and foreign exchange reserve are satisfactory Outlook for FY 2009, and Forecast for FY2010 During weather has been very good. The care taker Government and the newly elected Political Government placed substantial effort on expanding agricultural production. Aus production increased substantially from million metric ton in to MMT in Aman rice also had a bumper crop MMT in compared to 9.62MMT in After

2 the National election the Boro (Winter) rice was on the field. Electricity was diverted substantially from non agricultural to agricultural sector.subsidy was given to fertilizer substantially In next 15 days the harvest started.we had a bumper crop in boro crop of MMT in as compared to 17.8 MMT in Because of huge supply, price to the farmers has fallen. It is anticipated that the farmers may lower the sowing of boro crop in , However, Government is taking precaution in this regards. Government is thinking of reducing fertilizer price whose price has fallen internationally. All efforts are being made for sowing a bumper Boro crop. Growth in Agriculture sector with excellent production is likely to be 4.6 % in FY 2009.which is 1.4% higher than Industrial growth is expected to moderate in FY2009, as export production begins to slow in the second half of the fiscal year, reflecting cooling of global demand. The export sector got off to a robust start in the First quarter, when total shipments surged by 42%.In the second quarter, though. they declined by 1.2%, resulting in still- robust, cumulative export growth for the first 7 months of 18.2% Industrial sector is likely to grow at 5.9% as in compared to 6.8% during In service sector the growth during FY2009 is likely to grow by 6.3% Against this background, GDP growth is forecast to decline to 5.6% in the current fiscal year (FY2009), because of the effects of the global slowdown on exports and remittances and, as anxious consumers trim their spending, of lower domestic demand.. Next year(fy2010) will see 6.0% industrial expansion as the slump in external and domestic demand continues but the growth of this slump is declining. Services sector growth will grow at 6.5%(FY2010) because of turning around in activity in the export sector and an easing in consumer spending induced by moderation in incomes and remittance growth(as shown by recent data but this is an indication) As far Agriculture is concerned It will grow at a rate of 4.5% during FY2010 This is because Aus suffered because of drought. man is also suffering due to drought. We expect the fall of these crops will be covered by bumper Boro crop. GDP growth will be around 6% in

3 Balance of Payment Similarly, export growth is projected to decelerate, to 14.0% and 13.0% over these two yearsfy2009 and FY 2010.However, recent data shows other is likely to be turn around of the export. Import payments during the first half of FY2009 rose by 23.2% relative to the same period of FY2008. However, the opening of import letters of credit-a leading Indicator for annual imports declined by 2.2% in the first 7% months of FY2009, mainly because of the difficulties for international negotiating banks in supporting import activities in the face of liquidity shortages. With a further fall in international commodity prices, growth in import payments is expected to moderate and settle at 18.0% In FY2009 and 17.0% in FY2010. Remittance is continuously increasing due to improved remittance method and improvement in quality in service. In the first ten months of Bangladesh has earned $ billion which is 23% more than previous year In the during 10 years of the remittance will be $9980. As remittance increased reserve increased. Reserve increased from Taka crore in June 2008 increased by crore Taka to crore taka in March Foreign Employment During lakh81thousand manpower has traveled abroad which is 73.94% higher than previous year. During the first ten month of current year 5lakh 76 thousand traveled abroad. Due to recent world recession, economic problem and unnatural decline in price of fuel oil led to decline in construction industry in middle east and many economies including Malaysia faced adverse impact. As a result export of man power declined from Bangladesh. Remittance has been increasing because of the following reasons Government has adopted new method of manpower export particularly export of skilled power through developing them through training them at training centers. Inflation and Money Supply Inflation was very high in with a rate of 9.9%. People suffered. This current year in the month of July Inflation on the point basis was After the present Government took power the steps were taken by The government to reduce the unbearable pressure of inflation such as stable consumer prices. Priorities were also given to import by TCB.

4 Inflation slowed during the course of the fiscal year. The decline in food inflation was steeper than that of nonfood inflation by end -January. The rapid decline in international commodity prices and good domestic crop harvests are pulling inflation lower. The cut in the domestic administered price of petroleum in October arid December, after an increase in July, also cased inflation pressures, as has the modest monetary tightening in the second quarter of FY2009, and the further cut in domestic petroleum prices in January Inflation is projected at 7.0% for FV2009 and is expected to fall further to 6.5% in FY2010 There was a positive impact on inflation because there was a increase in money supply from 9.83% in to 11.86% in While the year- on year growth in private sector credit in December 2008 was 2.1.8%, the adjustments in the repo and reverse repo rates arc expected to guide credit growth back toward the annual program target of 18.5%. The MPS inflation projection of 8.5% for FY2009 appears overly pessimistic, considering the pace at which price pressures arc dissipating. However, Bangladesh Bank cut the repo rate in March 2009 to encourage banks to bower their lending rates. Macroeconomic policy developments Financial Sector Reforms The financial sector is overwhelmingly bank-based, with 49 banks accounting for about 95% of the sector s resources. Since the independence of the country the financial sector has been corrupted by defaults. In the mid 1980s reforms have been under taken in this sector. There has been progress in financial sector reforms, including bringing more discipline to the banking sector, increasing the operational autonomy and regulatory power of the central bank, and improving the governance of public financial institutions. The Government has secured commitments from the nationalized commercial banks (NCBs) to restrict new lending, reduce NPLs, and rationalize their branch networks. Special audits of the NCBs have been undertaken in accordance with international auditing and accounting standards. The ratio of NPLs to total loans in the banking system was 20.9% in September 2004, having declined from 41.1% in However, the NCBs were still burdened with a 29.7% NPL ratio in September 2004, due mainly to loans made on noncommercial grounds that

5 date back to the 1970s and 1980s. While local private banks as a group have a healthier financial position than the NCBs, even some of these face difficulties due to large NPL portfolios. Mr. Azizul Islam, member care taker Government, in charge of Finance and Planning is playing an active role in improving the role of financial sector. World Bank is implementing a project to improve the performance of the Bangladesh Bank. Government has decided to implement new international standard capital adequacy (Basel II) by early 2009 Capital Market Reform The Government is making effort to develop the reliability and efficiency of stock exchanges as investment market. The Securities and Exchange Commission (SEC) continues to carry out its regulatory reform activities in a bid to develop and protect investors interest by establishing fairness and transparency in the capital market To pave the way for the development of a secondary market in debt securities, the government 5- and 10- year bonds were listed for trading on the Dhaka Stock Exchange. Moreover, high interest rates offered on the Government s 3- and 5-year savings certificates have been trimmed to better align them with market- determined rates. Partly in response to restructuring of government interest rates, the Dhaka Stock Exchange general index moved up to 1, by 30 December 2004, for a 104% gain over the year. However, investor confidence in corporate governance of the listed companies and in execution of the rule of law remains low. In addition, the unavailability of issues with strong fundamentals and the absence of sufficient initial public offerings are major problems for sustaining the stock market s growth. The performance of Bangladesh Stock Exchange has improved in response to improvement in political situation. Government has floated public share: Dhaka Electric Supply Company and Power Grid Company is a direction of improving market capitalization and trading. Shares of mobile company Grameen Phone will be floated by this December 2008.It is a strong multi national company. It is going to infuse buo in the market and will improve market capitalization.

6 Analysis of Capital shows that up to 27 March 2007 market capitalization of all securities was Taka crore which is higher than June 2006.ln Chittagong Stock market the capitalization increased by 65.12% On g August 2006 Internet Balance Enquiry operation has been started. SEC is working toward developing Financial Reporting council so that companies can prepare proper financial report. General share price index of DSE stood at in June 2007 which was in June 2006.The number of securities listed with CSE reached 219 as of June 2007 from 213 as of June 2006.By end of June 2007 the issued capital of listed securities stood at Taka crore % higher compared to end of June 2006 Budget Reform The main objective of budget management is to enhance the effectiveness of public expenditure The revenue-enhancing measures adopted in recent budget includes expanding income tax and VAT coverage and rationalizing rates of customs duty, supplementary duty, and income tax. Attaining the revenue target will require an effective revenue mobilization drive and enforcement of greater discipline in tax management, including closer monitoring and supervision of staff. The budget will prioritize projects with growth and poverty reduction potential in the infrastructure and social sectors. Fully achieving these development priorities will require improved public expenditure management and stronger institutional capacity for implementing development projects. The caretaker Government is making a strong effort to mobilize resources for the budget for the year FY 2007.The r Government had taken steps to improve the performance of tax collection. National Board of Revenue has been modernized. It has been organized along functional line.large Tax payer units has been set up. Continuation of modernization of National Board of revenue under Strategic Development Plan Tariff set has been reduced (0%,5%,12%,25%) Agreement made with 25 countries to remove complexities arising from imposing dual taxes. Reforms in custom laws to overcome ports congestion with goods have been effected.. A survey has been undertaken to identify new tax payers. Poverty Alleviation Bangladesh s Interim Poverty Reduction Strategy Paper (l-prsp) was completed in March Since then, substantial progress has been achieved in moving from the l-prsp to a full PRSP, which incorporates prioritized

7 strategies and a medium-term macroeconomic framework for combating poverty. The draft PRSP, released in January 2005, centers on eight policy 6priorities that pursue the goal of accelerated poverty reduction. These include maintaining macroeconomic stability, maximizing pro-poor benefits from the growth process, strengthening the social safety net, advancing human development, assuring participation of poor and disadvantaged groups in the development process and their empowerment, promoting good governance, improving service delivery in the areas of basic needs, and protecting the environment. Strong efforts are being made to reduce poverty with impetus received from award of Peace Noble Prize to Professor Yunus.. Withdrawal of MFA and how Bangladesh is facing the crisis Although the MFA was phased out with effect from 1 January 2005, exporters are optimistic about continued steady growth of the garment sector in a quotafree world. Country (Brand) loyalty seems to have played its roles role. Particularly exports of knit garments had excellent growth especially to Europe. However, the industry still faces problems. There is a labor problem in all the garments factories demanding higher pay.there has been violent strikes damaging property. There was a negotiation between workers and garments owners on the pay package. Various strata of the society got involved in solving this labor problem. The problem continues. At the same time the garments export is affected by fallout from global financial turbulence. Country s major export destinations are hit hard by the economic turmoil stemming from the US subprime crisis. The crisis burst in August 2007 Among others, the garment industry is stressing the need for the creation of a central bonded warehouse, funding facilities for development of an integrated domestic supply chain, and relaxation of the rules of origin to enable it to face the post-mfa challenge of global competition. Many garment entrepreneurs have prepared themselves by consolidating and restructuring their operations to improve competitiveness as well as diversification. At the same time this will help Bangladesh cope with the global recession titled US subprime crisis.

8 The garment industry is hampered by costly infrastructure bottlenecks. The challenge is now to lower costs and improve infrastructure to meet increasingly stiff competition. Because of poor infrastructure and high import dependence, the purchase order to delivery cycle (or lead time) of the garment industry is 1 month longer than in major competing countries. This problem has become even more critical in the post-mfa era since the industry now needs to compete with much smaller margins. Over the years, the role of FDI in the garment industry has significantly declined as the Government opted to preserve the valuable quotas for the locally owned factories. This has deprived the country of benefits from the inflow of superior technology and management as well as direct market access and links to EU and US buyers. Economic prospects Prospects for FY2009 and F2010 will hinge critically on the way in which the democratically elected government (which assumed office in January 2009) continues and deepens the economic reforms initiated during the caretaker Government s 2-year tenure. Prudent macroeconomic management, in particular prompt action to address the downside risks to growth from the global slowdown, will also be required. The Government will need to adopt measures to accelerate ADP implementation, including addressing deficiencies in institutional capacities in key line ministries, raising revenues, and encouraging greater private participation in infrastructure investment. Economic prospects will also depend on the continued availability of adequate external assistance despite the economic downturn-- for supporting public spending on infrastructure, especially for rolling back growing power shortages. Ultimately, climate change may threaten the significant gains made in poverty reduction over the past 20 years, and efforts to reduce poverty will only be sustainable over the longer term if they successfully incorporate climate change adaptation in development planning. Forecast Risk Several risks to the economic outlook could materialize from the global economic slowdown. Revenue collections may come under further pressure if economic activity declines more than expected, which would constrain the Government ability to spend on essential infrastructure and social sector programs.

9 There is a risk of budget revenue shortfall.other risks are lack of supply response by the farmers. Another risk is that the Government officers may not put in intense effort to the distribution of the agricultural inputs: Fertilizer, Seed. Irrigation The other risk is higher than expected shortage in power and gas. Implementation of power projects may be delayed affecting growth of the economy. The risks of political disruption and natural disaster are going to adversely affect investment and growth.

Speech by Mr. Amando M. Tetangco, Jr. Governor, Bangko Sentral ng Pilipinas

Speech by Mr. Amando M. Tetangco, Jr. Governor, Bangko Sentral ng Pilipinas At the International symposium hosted by the Center for Monetary Cooperation in Asia (CeMCoA) of the on January 22, 2007 in Tokyo