Dhaka, Bangladesh (BBN) – The year 2013 has been one of the most challenging years for the country’s economy in recent times. Failure to convince international agencies regarding Padma bridge project, collapse of a garment factory killing over 1,100 people and subsequent US suspension of GSP facilities, large scale financial scams, unprecedented political violence, etc damaged the image of the country and its growth potentials, the Citibank N.A. said in its annual market update 2013. 

However, against all odds, Bangladesh has been able to attain a GDP growth of 6.03 percent FY13. Although this marks a drop in GDP growth rate for two consecutive years, growth of over 6.0 percent is quite respectable where the projected growth of developing countries is around 5.0 percent in 2013. The drop in GDP growth rate from 6.23 percent in FY12 is mainly attributed to slowdowns in agriculture and service sector.

The slowdown in agriculture sector from 3.11 percent in FY12 to 2.17 percent in FY13 is largely due to the base effect of two consecutive years of record growth and lower output due to the falling prices along with weather-related disruptions.
On the other hand, investment climate suffered during the second half of FY13 due to series of national strikes and consequent disruptions to the supply chain. As such growth of service sector slowed down to 5.73 percent in FY13 from 5.96 percent in FY12 as the retail and wholesale trade sectors were particularly affected.

 Although a target of 7.2 percent GDP growth was set in the national budget for FY 14, the target seems a bit ambitious amid faltering global economic recovery and domestic instability.

Different international agencies have already revised their growth projection downwards for FY 14, some even cautioning a growth rate below 6.0 percent.
However, the central bank of Bangladesh, in its half yearly Monetary Policy Statement for July-December 2013, forecast that output growth is unlikely to deviate significantly from the last ten year average of 6.2 percent.

Supply chain disruption led inflation marginally up ahead the year-end

To reflect changing consumption patterns and demographics, Bangladesh Bureau of Statistics introduced a new consumer price index (CPI) series, effective from July 2013, using 2005-06 as the base year.

Using the new base year, point-to-point inflation peaked in April 2013 at 8.37 percent from a moderate level of 6.62 percent in January, before it started to ease from June onwards. By October point-to-point inflation came down to 7.03 percent, its lowest level in 2013.

However, due to the political and economic impasse, inflation inched up to 7.15 percent in November. This increase was mainly driven by higher food inflation that prevailed in the preceding months due to the disruption in the supply chain as a result of continual blockades throughout the months of October and November.

Food inflation shot up in October to 8.38 percent from 7.93 percent in September and recorded at 8.55 percent in November.
However, sluggish economic activity restricted non-flood inflation below 6.0 percent level post August. Annual average inflation also rose marginally to 7.51 percent (using 2005-06 base) in November on account of increased food inflation.

The national budget for FY14 set inflation target of 7.0 percent using the 1995-96 base. The equivalent target using the 2005-06 base could be in the range of 6.0 – 6.5 percent. The risks to the inflation target stem partly from the wage increase in private (garment) sector and the expected wage increase in the public sector, which will create aggregate demand pressures. Another risk to food inflation in particular stems from possible supply-side disruptions due to political strife and natural disasters.

Trade deficit narrows down on sluggish import

The country’s trade deficit in FY13 shrank to the lowest level in three years mainly due to robust exports against declining imports during that period.

According to statistics released by Bangladesh bank, the deficit stood at US$ 6.9 billion, marking a 38.10 percent drop from the last fiscal year. During FY13, export receipts surpassed $ 27 billion while import amounted to $34 billion. Trade deficit in FY12 was $11.2 billion where, export earnings and import payment stood at $ 24.3 billion and $ 35.5 billion respectively.

Export earnings in the first five months of FY14 stood at $ 11.96 billion, registering a growth of 18.02 percent from the same period of the previous year despite myriads of challenges. This performance is impressive given the recessionary economic environment in the EU, which is the most important export market for Bangladeshi products.

However, attaining the export target of $ 30.5 billion in FY14, which is 12.8 percent higher than actual realization in FY13, would be a challenging task in view of the image crisis of the garment industry due to the Rana Plaza collapse which killed over 1,100 people and ongoing internal disruptions due to nationwide strikes.

Although the impact of GSP suspension by the United States did not hurt the country’s exports much, similar reactions by the EU poses significant risk.

On the other hand, import growth remained sluggish during FY13, partly reflecting the significant fall in food import demand, lower petroleum imports as well as slower demand for imports related to manufacturing output. Import payments during Jul-Oct’ FY14 stood at $ 11.96 billion, increasing by 9.1 percent from the same period last year.

Remittance growth slows down towards the year-end

Inward remittances grew by 12.6 percent to $ 14.45 billion in FY13 compared to $12.84 billion in the previous year. The higher remittance growth through most of FY13 was associated with sharply higher number of workers going abroad.

However, remittance receipts during Jul-Nov' FY14 was down by 9.20 percent to $ 5.55 billion against a growth of 24.25 percent during the same period last year. Total remittance in 2013 until November stood at $ 12,611.57 million, marking a 2.16 percent decline over that in 2012.

Traditionally, remittances rise during festivals such as Eid, but this year such a trend was not observed during the August and October Eid festivals.

The drop in remittance inflows was mainly due to the large decline in out-of-country employment. According to a Bangladesh Bank publication, the number of migrant workers dropped by 34 percent between Jul-Apr FY13 relative to the same period in FY12.

FX reserves continue to break historic highs

Gross foreign exchange reserves of Bangladesh Bank rose to a record $ 17,105.87 million at the end of November, marking a 45.53 percent growth over the reserve figure of $11,753.96 million a year ago.

The rise in oil import-related credit and strong aid disbursements in FY2013 contributed to increasing the central bank’s foreign exchange reserves. In December, reserves further increased to hit historic highs above $18 billion level (as on 24-Dec-13, reserves stood at $18,043.90 million which is equivalent to 6.2 months of import coverage).

BB aligns Monetary Policy to boost economic growth

In FY12 the economy faced challenges of rising inflation and balance of payments pressures and the Bangladesh Bank (BB) pursued a restrained monetary policy stance which, along with other policy measures, helped curb inflationary pressures and significantly strengthened foreign exchange reserves.

In FY13, the economy faced a different set of challenges when robust foreign remittance and export growth along with sluggish import growth led to a sharp growth of Net Foreign Assets which needed to be sterilized. Declining inflation and concerns over a slowdown in growth created space for a 50 basis point rate-cut in January 2013 with the aim of influencing bank lending rates downwards. At the same time the January 2013 Monetary Policy Statement (MPS) set out a monetary program consistent with bringing average inflation down to the targeted 7.5 percent level.

Second half of FY13 data showed that solid progress was made towards these objectives. Reserve money growth and growth of net domestic assets of the BB remained within program target, broad money growth was also close to program targets and average inflation continued to decline, though core inflation (non-food, non-fuel) was on a rising trend since April 2013 reflecting aggregate demand pressures.

Retail interest rates also declined with the spread between lending and deposit rates dipping below 5% and its trend indicating that lending rates have declined faster than deposit rates. Frequent strikes in the second half of FY13 contributed to a slowdown in domestic private sector credit growth.

The monetary stance in H1 FY14 took the recent economic developments into account and targeted a monetary growth path to bring average inflation down to 7.0 percent (using the 1995-96 base), while ensuring that credit growth is sufficient to stimulate inclusive economic growth and contain reserve money growth to 15.5 percent and broad money growth to 17.2 percent by December 2013.

The space for private sector credit growth of 15.5 percent for December 2013 and 16.5 percent in June 2014 has been kept well in line with economic growth targets and higher than the average of ‘emerging’ Asian economies.

The current monetary policy stance also aims to preserve the country’s external sector stability. The BB anticipates further build-up in foreign reserves in FY14 though at a more moderate pace than FY13. The central bank will continue to support a market-based exchange rate while seeking to avoid excessive foreign exchange rate volatility.

BBN/SSR/AD-03Jan14-9:48 pm (BST)