"The moderation in GDP growth would result mainly from a return to more normal growth in agriculture following the post-flood high-growth recovery of FY06," said an update of ADB's annual flagship publication Asian Development Outlook 2006 issued in April. The update released yesterday forecast economic trends in the region and identified a number of risks that could pose a threat to both fiscal and monetary stability including increase of inflation in Bangladesh.

"Despite the generally positive outlook though, substantial under pricing of energy products is continuing to build large financial imbalances, which are posing a growing threat to both fiscal and monetary stability," the report said.

Other risks include political uncertainty that could disrupt the economy in the lead up to general elections due in January next year, it said, adding that conditions for expansion in industry as well as in services are expected to be favourable, though the frequent power disruptions need to be addressed. Referring to recent labour unrest over wages in the garment industry, the report identified social compliance issues as one of the major challenges of the country's main export earning sector in the coming days.

Despite the central bank's indication of a continuing tight monetary policy, the elections suggest that a broadly accommodative stance will continue and, with the legacy of large rises in monetary aggregates in FY2006, only a slight moderation in inflation is expected during the year, the report said. Apart from international price rises, inflationary pressures include likely further upward adjustments to domestic oil prices, though these may well come only after the January elections and expected further depreciation of the taka, it added. While the government has indicated that a further round of fuel price increases in FY07 is possible, it clearly needs to adopt a new pricing system that will regularly set retail prices closer to international levels, the report said. It suggested that a new system is evidently needed to avoid the further accumulation of unsustainable debt that has resulted from non-market pricing. "Then, as a next step, the government could relieve the present stress in the financial system by cleaning up the BPC [Bangladesh Petroleum Corporation and NCB [Nationalised Commercial Banks] balance sheets through budgetary allocations," said the report.

Developing Asia's strong economic expansion is expected to continue, with growth projected at 7.7% in 2006 before easing to 7.1%, the ADB report said.