Performance of the Economy During the First Half of FY Organized By Islamic Economics Research Bureau 8 February 2008 By Prof. Ayubur Rahman Bhuyan

1. Seminar Theme Performance of the Economy during the First Half of Fiscal (FY08) Economic Indicators, viz, GDP, Real Sector production, Public Finance, Financial Sector developments, External Sector Performance etc are highlighted

2. The economy is under some stress Inflation rate remains high Revenue shortfall remains, despite progress in tax collection Economic reforms have slowed down Poor ADP Implementation FDI is declining Political uncertainty, low business confidence, and infrastructural constraints vitiate the investment climate

3. There are some positive features, however Macroeconomic fundamentals are weak but gradually improving Exports are gathering pace after a slowdown Steady growth of worker remittances Foreign aid disbursement has improved Exchange Rate is relatively stable Foreign Exchange Reserves appear comfortable

The Real Sectors 4. Agriculture: Food Production (in Million Metric tons) Foodgrains production in FY07 was 28.4 million MT, about 12% short of production target Production target for FY08 was initially set at 34.3 million MT but subsequently refixed at 31.6 million MT, which is 11.4 percent higher than last year’s actual production Will the revised production target be achieved?

5. Agriculture Contd. The output of Aus, the first crop, was short of the target Harvest of Aman, the second crop, was affected by two consecutive floods and SIDR. Perhaps 1.4 million tons were lost Much will depend on the performance of the present Boro crop, which will depend on timely availability of fertilizer and irrigation water (dependent on diesel and electricity supply) Outlook for minor crops (maize, pulses, potato, vegetables) looks promising

6. Agriculture Contd. Drawing on last year’s experience of shortages of fertilizer and inadequate irrigation facilities due to the disruption in the supply of electricity and diesel, the Govt. has taken steps to ensure adequate supply of the required inputs Agricultural credit disbursement has increased significantly However, agriculture sector growth this year may still be less than last year’s 3.2%, perhaps between % Govt. will need to continue its efforts to ensure timely supply of fertilizer, quality seeds, and other agricultural inputs, provide agricultural credit and marketing support

7. Agriculture Contd. Foodgrains production (Million MT) Food CropActual FY06Actual FY07Original Target FY08 Revised Target FY08 Estimate FY08 Aus ? Aman ? Boro ? Wheat ? Maize ? Total ?

8. Industry In July-September 2007, production of large and medium scale industries slowed down to a deplorable 0.61% from the 10.01% growth recorded in the previous fiscal While the growth of all major industries decelerated, jute goods, cotton textiles, RMG, and leather experienced negative growth Negative growth was observed in mining and electricity sub-sectors Major impediments to higher industrial growth now are: Infrastructural constraints (power, gas, road, ports) Labour unrest (as seen in the garments sector) Overall prospect: Growth may be % lower than in FY07

9. Services Sector In the first quarter of FY08, the services sector seems to have maintained its past momentum as reflected in such indicators as the volume cargo handled in Chittagong port and bank advances to related sectors Bank advances to three important sub-sectors – construction, transport and communication, and trade have increased However, construction work was affected by high cost of building materials. Government’s reform measures have also brought disincentives to builders Overall prospect: If business and investment environment improves, the sector may perform well

10. GDP Growth in FY07 was 6.5%, riding on higher growth in services, and despite slower growth in industry and agriculture This year (FY08), agriculture and industry sector growth may be lower than last year Industry and service sector growth will depend on a conducive business and investment climate

11. GDP Contd. Overall GDP growth may be lower this year than last year’s 6.5%, but still remain around % Various growth projections: WB and IMF 5.5% each; BBS 6.0%; BB % To sustain higher GDP growth, the country needs to improve infrastructure, and meet the growing energy demand All this will require substantial investment and faster progress with reforms

12. Growth of GDP and Sectors (%) [At Constant FY96 Prices] SectorFY05FY06FY07ELikely growth in FY08P Sector Share in GDP FY07 1. Agriculture: a) Agriculture and forestry i. Crops & horticulture ii Animal farming iii. Forest and related services b) Fishing Industry : (a) Mining and Quarrying (b) Manufacturing (i) Large and Medium scale (iii)Small scale (c) Power, Gas and water supply (d) Construction Services (a) Wholesale and Ret. Trade (b) Hotel and Restaurants (c) Trans, Storage and Commn (d) Financial Intermediations (e) Real Estate, renting, others (f) Public Admn and Defence (g) Education (h) Health and Social Work (i) Community, Social and Personal services Total GDP Source: Bangladesh Bureau of Statistics. E=Estimate, P=own projections

13. Government Revenue In the first six months of the present fiscal, NBR’s revenue collection grew an impressive percent to Tk billion Initial NBR revenue target for FY08 was Tk billion – 18.0% higher than in FY07 Although it missed the original half-yearly target by about 11.0 percent, the NBR felt encouraged by the better-than-expected half- yearly revenue collection and raised the annual revenue target to Tk billion, which is up by Tk billion from the original target

14. Government Revenue Contd. The rate of tax collection will need to be much faster to reach the new target In the first six months of FY08, Income tax collection increased by 41.90% reflecting the impact of ongoing tax reform measures, and VAT collection by 18.61%. Collection of customs duty grew by 8.88% despite duty exemption/reduction on essential items (mostly food) of import Non-NBR tax collection in the first 5 months increased by 24.75%, compared to percent in the matching period of FY07 Non-tax revenues increased by only 4.0% during the first quarter of the current fiscal over the corresponding quarter of FY07

15. ADP The ADP target for FY08 was set at around 5.0% of GDP, compared to 5.6% in FY07. The target is lower than the PRSP target of 6.2% ADP size for the current fiscal is Tk. 265 billion – 22.7% up from the revised ADP of FY07 ADP implementation in the first six months was only 21.0 percent, the lowest in the last ten years The budget made a 35% increase in the ADP outlay for projects in less developed regions (Khulna, Barisal and Rajshahi Divisions) to reduce regional disparity. The fate of the projects is not known

16. Deficit Financing (Billion Taka) PeriodNet Borrowing from Banks Net Non- Bank Borrowing Total Domestic Financing Foreign Financing Total Financing July-Nov (97.14%) 1.81 (2.86%) (100.00) July-Nov (81.90%) (18.10%) (100.00) Budget deficit in July-Nov 2007 rose to Tk billion, which is 77.2 percent higher than the deficit in the same period of last year Such an extra-ordinary growth in deficit financing in the first five months of a fiscal year is unprecedented

17. Deficit Financing Contd. Domestic financing of the deficit during July-Nov 2007 stood higher at Tk billion (81.9% of the total) as against Tk billion or 97.1% of the total in July-Nov 2006 Foreign financing also increased – to Tk billion (18.1% of the total) in July-Nov 2007 from Tk. 1.8 billion in the same period in 2006 Revenue shortfall is to some extent responsible for the increase in deficit financing but the major cause is the government’s higher revenue spending

18. Deficit Financing Contd. Net bank borrowing provided more than six times the amount provided by net non-bank borrowing Net borrowing from banks in the first five months of FY08 (July-Nov) was Tk billion, which exceeded the targeted bank borrowing of Tk billion for the entire fiscal year Net borrowing from banks increased by 67.9% in the first five months Net non-bank borrowing in the first five months fell by about 12%

19. Monetary Developments Reflecting BB’s attempts to contain monetary expansion, broad money (M2) recorded a lower growth of 4.74% during July- November 2007 against 6.50% growth in July-November 2006 A slower growth of domestic credit was responsible for the low growth of M2 It is noteworthy that stricter BB policies that brought down the growth of broad money did not help contain inflationary pressure

20. Domestic Credit Domestic credit increased by 6.75% during July-November 2007, compared to 7.09% in the same period of 2006 The rise in domestic credit during this period was due to the rise in private sector credit by Tk billion or 7.66 percent, and public sector credit by Tk billion or 4.17 percent over end June 2007 In the component of credit to the public sector, credit to the govt. (net) increased by Tk billion or percent. However, credit to the “other public sector” decreased by Tk billion or percent

21. Domestic Credit Contd. Bulk of the public sector credit is in the form of govt. borrowing, which may go further up in the second half of the fiscal due to increased government spending Credit growth to the private sector is expected to go up in the second half following BB’s announcement to pursue a relatively easy money policy as per its latest monetary policy statement for the second half of the current fiscal

22. Industrial Credit In the first quarter of FY08, disbursement of industrial term loans by all banks, including NBFIs, stood higher at Tk billion, increasing by 42.3 percent from Tk billion in the matching period of FY07 The major share of credit went to textiles and RMG, cement, pharmaceuticals and medical services, construction, and telecom sectors Recovery of loans during July-September 2007 increased by about 50.8 percent over the same period of the preceding year, indicating an improved condition in the disbursement of term loans

23. Industrial Credit Contd. A net amount of Tk billion was injected as term loan in the first quarter of FY08. Although it is higher than in the matching period of FY07 (Tk billion), it seems to be inadequate to meet the industrial sector’s needs The small flow of loans could be due to the uncertainty in the business environment Overdue of industrial term loans at the end of September 2007 stood higher at Tk billion compared to Tk billion at end of September 2006 Overdue industrial term loans as percentage of outstanding loans deteriorated, increasing from 14.21% at the end of Sept 2006 to 16.73% at the end of September 2007

24. Agricultural Credit Disbursement of agricultural credit through Government-owned and private banks in the first six months of FY08 stood higher at Tk billion, a 61.4% increase over Tk billion in the same period (July-December) of the previous fiscal The recovery of agricultural credit during this period also stood higher at Tk billion compared to Tk billion during the corresponding period of 2006 There was a net credit flow of Tk billion to the rural economy during this period. For encouraging agricultural sector production, a larger net disbursement would be appropriate The position of overdue agricultural credit as percentage of total outstanding improved, decreasing from percent at the end of December 2006 to percent at the end of December 2007

25. Interest Rate Growing spread between lending and deposit rates of banks is worrisome Between 30 June and 30 Sept 2007, the spread widened by 0.24% - from 5.92% to 6.16% In Sept 2007, the average lending rate was 12.92% and the average deposit rate 6.76%

26. Non-Performing Loans (NPL) The ratio of gross NPL of the banking sector marginally increased from 13.96% as the end of June 2007 to 14.04% at the end of September 2007 Gross NPL ratio for NCBs rose to 26.9% during the first quarter of FY08 from 26.2% at the end of the fourth quarter of FY07 In PCBs, gross NPL ratio increased from 6.03% to 6.11% IN FCBs, the ratio increased from 1.35% to 1.60% Net NPL for all banks increased marginally to 5.59% in Sept 2007 from 5.41% in September The increase in net NPL of NCBs and PCBs was the main contributor to the increase in the overall net NPL

27. Stock Market A steady increase in price indices and turnover was observed in the first half of the fiscal The general index at DSE at the end of December 2007 stood at , which is 40.4 percent higher than the index, , at the end of June 2007 The volatility observed in the second half of FY07 eased in the first half of FY08 The number of enlisted issues increased from 325 in June to 350 in December 2007 Market capitalization of all shares and debentures has increased

28. Scope for further Improvement in the Stock Market Major causes of improvement are: diversion of funds from bank deposits because of their lower return; increased participation by merchant banks and brokerage houses; hesitancy on the part of businesses to invest in the manufacturing sector A major weakness of the stock market is the large number (100 or so) of Z-category companies Poor administrative capacity of the SEC is another weakness. SEC has become a regulatory agency rather than a promotional body

29. Scope for further Improvement in the Stock Market Contd. Listed companies may be given more favourable tax treatment than the non-listed ones Earnings from government bonds and savings instruments should be subjected to income tax while dividend incomes may be made tax-exempt To attract more investors, efforts are needed to increase the supply of quality shares such as through the multinationals, especially the mobile phone companies The government may also participate in the capital market more actively with the aim of making the market more liquid, such as through floating treasury bonds

30. Scope for further improvement in the Stock Market Contd. Interest rates on savings instrument should be lowered and restrictions on the limit of investment in savings instruments should be re-imposed Punitive actions should be taken by the SEC against errant companies that do not call AGMs regularly or do not pay dividends commensurate with their profits The Government may consider offloading its shares of profitable SOEs in the capital market By successfully mobilizing funds from the capital market, the government can also reduce its dependence on bank borrowing to finance its development programmes

31. External Sector: Exports Export target for FY08 is $14.5 billion, which is percent higher than the last year’s actual export of billion After experiencing a negative growth (-2.63%) in the first four months of the fiscal, due primarily to shortfalls of export from knitwear and woven garments, exports posted an impressive 21.6 percent growth in November as garment exports bounced back As a result, export earning in the first five months of FY08 increased by 2.40% to $5166 million, which was 14.5 percent short of the target

32. Exports Contd. Knitwear exports picked up pace since October and grew 6.19 percent in the first 5 months. The woven sector also recovered in November after suffering a massive fall of nearly 12 percent in the first quarter However, export of frozen food items such as shrimps continued to perform poorly. Its exports in the first five months were at least 4.0 percent less than in the same period last fiscal Slower or negative growth occurred in the export of jute goods, leather, chemical products, engineering and electronic goods, textile fabrics, and computer software

33. Exports Contd. The increase in Bangladesh's export earnings is attributed mainly to the increase in demand for low-end garments abroad, including in the United States, imposition of import quota by EU as US on Chinese exports, and government support (cash incentives) to a variety of exports The export growth may be difficult to sustain after the lifting of quota on Chinese export in January 2008 Boosting exports by providing cash incentives is not a sound policy

34. Exports Contd. Emphasis should be given on value added exports Measures needed to boost exports are infrastructure development, export diversification, build-up of entrepreneurial skills, and improvements in the labour situation in the garment sector. Any recurrence of labour unrest in garment factories may cost the sector dearly New export markets should be explored Efforts should be intensified to obtain duty free access for BD’s exports to developed and advanced developing country markets. Opportunities to increase exports to the regional markets will need to be explored (e.g., SAFTA and BIMSTEC)

35. Imports Imports in the first five months (July-November 2007) of FY08 increased by 11.06% to $7560 million (from $6807 million in the matching period of FY07) Foodgrains imports increased by a massive 160 percent, raising its share to 6.55 percent of total imports from 2.94 percent in July-Nov 2006 Other consumer goods imports increased by percent over the same period of the previous fiscal

36. Imports Contd. The import of industrial raw materials, the largest import component accounting for about 40 percent of total import, rose by percent, about the same as in the past year, but that of intermediate goods decelerated to percent from percent of the previous year Import of capital machinery fell by 7.12 percent, and that of petroleum and petroleum products fell by 10.4 percent Import of machinery of miscellaneous industries increased by a lower rate of 9.90 percent compared to percent during the same period of the past fiscal Import of capital machinery declined mainly because of political uncertainty, but BB sources say that it started improving from the month of November

37. Imports Contd. Import LCs opened in the first five months of FY08 rose by 21.82% to $8846 million from $7261 million from the same period of FY07 Import LCs worth $7560 million were settled during July-November period of FY08 compared with $6480 million in the same period of the previous fiscal – a percent increase The rising trend in development imports is good for economic growth. However, most such imports, viz, essential intermediate goods, fuels, and capital machinery have either recorded negative growth rates or their growth has decelerated

38. Remittances During July-December 2007, inward remittances were $3447 million (20.49% above the figures in the matching period of 2006) Remittances in December 2007 hit a record high of $642 million in a single month Manpower export increased significantly during the 12 months between January and December 2007 but majority of them are unskilled and semi-skilled workers. Skilled workers and professionals were a small percentage (20% only) of the total

39. Balance of Trade and Payments Trade deficit worsened in the first five months of FY08 – from $1739 million in July-October 2007 to $2407 million in July-November 2007 Major cause of deficit is the widely disparate rate of growth of exports and imports Service and income deficits, worsened, too Despite larger current transfers of $2806 million, the current account balance recorded a deficit of $161 million during July-November 2007 as against a surplus of $579 million during July-Dec 2006 The overall balance of payments, however, showed a small surplus due mainly to the surplus in the financial account

40. Foreign Aid Net foreign aid received in the first five months of the fiscal (July- Nov 2007) was $ million, compared to a meager $26.21 million in the matching period of 2006 The markedly higher net aid receipt was because of the increased disbursement of project aid in the aftermaths of the two floods Total gross aid disbursement during July-November 2007 was higher at $ million compared to $ million during July- November 2007

41. Foreign Aid Contd. Aid flows have shrunken in the recent years because of non- fulfillment of donor conditionalities: –upward adjustment of fuel and energy prices –implementation of public procurement law –strengthening institutions like BTRC, BERC, ACC to ensure good governance –reform of tariff structure – reduce CD and SD –privatization of NCBs Fulfilling donor conditionality would ultimately be beneficial for the country

42. Foreign Direct Investment (FDI) FDI in the first four months of FY08 was $263 million (as against $274 million in the matching period of FY07) – a 4 percent decline Government’s indecision on some big FDI proposals may be a reason behind falling investment. Uncertainty over the political situation may be another The registration of new FDI in the first four months has declined by as much as 84 percent With improvements in political stability, FDI inflow may increase

43. Foreign Exchange Reserves BB’s gross foreign exchange reserves rose to a record high of $5.51 billion at the end of December 2007, thanks to the high growth of remittances The reserves in December 2007 was also markedly higher than the $3.88 billion reserves as of end December 2006 Gross foreign exchange reserves of commercial banks at the end of December 2007 was higher at $389 million against $373 million as of end November This was also markedly higher than the balance of $246 million as of end December 2006

44. Exchange Rate Movements High reserves have pushed up the external value of the Taka against the dollar Exchange rate of Taka per US$ was Tk at the end of January It fell to Tk in June 2007, and to Tk at the end of December 2007 Taka appreciated by 0.72% at end December 2007 over January 2007, and by 0.34% over end June 2007

45. Inflation The average annual rate of inflation (12-month average CPI) increased to 8.65% in November 2007 from 8.01% in September 2007 On point to point basis, the rate of inflation increased to 11.21% in November 2007 from 9.60% of September 2006 Inflationary pressure rose mainly because of the rise in food prices. Food inflation on point to point basis rose to 13.83% in November 2007 from 9.0% in October 2006 On average basis, food inflation rose from 7.69% in October 2006 to 9.85% in November 2007

46. Inflation Contd. BB’s strict monetary policy has not been effective in cutting down the inflationary pressure Supply Side constraints and institutional factors are responsible for price rises These constraints will need to be removed to bring down the inflation rate Appropriate fiscal policy measures will be needed to supplement the monetary policy for controlling inflation

47. Conclusions Macroeconomic trends indicate that the economy has remained under considerable strains in the period under review However, increased remittances provided a cushion Exports have also begun to recover Growth projections for the economy in the current fiscal year (FY08) vary widely – from 5.5% to 6.2%. Actual growth could be close to 6%

48. Conclusions Contd. Downside risks that may reduce the growth rate: –growing inflationary pressure –high world prices of food and fuels –serious power shortage –The likely effect of the withdrawal of restrictions on certain categories of Chinese apparels on Bangladesh’s RMG sector –slow progress in economic reforms –political uncertainties

49. Conclusions Contd. Higher borrowing by government is an issue of concern Government borrowing should be kept under control. Otherwise, credit flow will be inadequate to meet the requirement of industry and trade Renewed labour unrest in RMG sector, political tensions, and congestion in Chittagong port have upset major RMG buyers, who are reportedly looking for alternative sources of supply After initial success of the caretaker government, problems of Chittagong port have reappeared, which must be solved

50. Conclusions Contd. Tax effort will need to be intensified to achieve the revised revenue target Inflation must be held in check Restricting private sector credit while allowing large government borrowing from the banking system will not contain inflation, but raise the inflation rate

51. Conclusions Contd. Greater efforts will be needed to improve the implementation of the ADP Further adjustment of fuel prices has been inevitable to eliminate the need for fuel subsidy and make room for priority spending on social services and infrastructure Time is not, however, propitious for raising fuel prices at the moment Investment climate will need to be improved to attract FDI For improving the investment climate, meaningful steps will be needed to develop physical infrastructure, improve law and order, and eliminate corruption

52. Conclusions Contd. To achieve a higher export growth, diversification of export production and export destination is necessary Competitiveness of export should be achieved through quality improvements and reduction of costs rather than by export subsidy An adequate power sector strategy will need to be devised

53. Conclusions Contd. Political stability is a must for economic growth Prolonged uncertainty about the general election and transfer of power to the elected representatives will damp down economic activity and hence growth prospects Besides slowing down production and growth momentum, political uncertainty will affect competitiveness and the investment climate

54. Conclusions Contd. However, the people of Bangladesh are always optimistic In the last 36 years of its existence, Bangladesh has seen many economic and political crises, which it has been able to overcome Bangladesh has acquired great resilience to economic hardships over the years Despite disruption caused by political programmes in most of the fiscal 2006, the economy grew by 6.6 percent. There is no reason why it cannot grow by at least 6.0% this year.

=Thank you=