ADB cuts economic growth forecast for Bangladesh

The Asian Development Bank has revised down its GDP growth forecast for Bangladesh to 6.1 percent for the current fiscal year due to the past three months' political unrest. 

“Political unrest is undermining brighter growth prospects by affecting private investment and exports,” according to Bangladesh Quarterly Economic Update released by the lender yesterday.

In December last year the ADB in its update for the first quarter had forecasted that the GDP (gross domestic product) growth in the current fiscal year would be 6.4 percent.

“Prior to the onset of the political unrest (first six months of fiscal 2015), the economy was growing briskly, indicating higher growth prospects for the current year,” the ADB said.

Strong remittance inflows boosted consumption. Private investment was also picking up, reflecting higher imports of capital machinery. Although export remained subdued, it gradually improved as export orders began to rise, the lender said.

It said, although the country is resilient to domestic and external shocks, GDP growth will be further affected if political unrest continues.

The World Bank also downsized its growth forecast for Bangladesh -- to 5.6 percent from its previous projection of 6.2 percent -- due to political turmoil.

Along the same line, the government brought down its own projection to 6.8 percent from 7.3 percent.

Planning Minister AHM Mustafa Kamal told reporters last week that despite the unrest, GDP growth in no way would come below 6.5 percent.

The ADB said the agriculture sector grew 3.3 percent in fiscal 2014 after two consecutive years of lower growth; this was aided by good weather and continued government support.

Agriculture growth in fiscal 2015 will be lower than expected due to production loss of perishable non-cereal products caused by disruptions in supply, distribution and marketing. Earlier the ADB had forecasted that the agriculture sector would grow by 3.5 percent this year.

The industrial sector would grow by 8.5 percent, the lender said, against its previous projection of 9.2 percent.

The sector suffered as exports, small-scale manufacturing and construction activities have been affected by political unrest, it said.

However, better performance of large- and medium-scale industries prior to the onset of the unrest is expected to hold up the industrial sector's growth, it said.

The ADB said the services sector's growth is expected to moderate to 5.7 percent from 5.8 percent in the previous year, as transport, trade, wholesale and retail business activities have been affected.

The services sector grew 5.8 percent in fiscal 2014, compared with 5.5 percent the year before, mainly due to higher agricultural growth, and stronger trading activity during the second half of the year.

The ADB said growth is expected to rise to 6.4 percent in fiscal 2016, aided by higher remittance and export growth, as well as the continued economic recovery in the US and the euro zone.

It said, if the political situation stabilises, consumer and investor confidence is likely to rise, thereby stimulating demand and strengthening growth momentum.

In addition, infrastructure constraints are expected to ease with the completion of the ongoing projects, particularly the power plants.

The ADB also said Bangladesh needs to maintain political stability and improve the quality of governance to boost investment.

The ongoing political unrest, if it lingers, will further decrease investor confidence, and affect implementation of annual development programme and revenue collection.

It may affect macroeconomic stability, pushing up inflation and affect the external balance.

The ADB also said a sound financial system is vital for private and foreign investment. The capacity of banking to finance large projects and to provide sufficient trade finance is limited.

Discipline in the banking system needs to be strengthened by effective competition, efficient management, high credit standards, and enhanced supervision and corporate governance, especially in state-owned banks, it said.

Although an expected increase in gas and electricity prices may put some pressure on prices over the coming months, average inflation is expected to moderate to 6.5 percent by the end of June. This will happen due to easing supply constraints, a better crop outlook, a supportive monetary policy, and a sufficient public stock of food grains, the lender said.

Lower food and oil prices in the international market will also contribute, it added.