Bangladesh on elevated growth path: Citi
Bangladesh has managed to set growth on a higher trajectory, posting 7.05 percent economic growth in fiscal 2015-16, on the back of a surge in both private and public investment as well as an increase in consumption expenditures, banking giant Citi said in its half-yearly market update.
Higher implementation of the annual development programme, higher consumption driven by a new pay-scale for public sector employees and moderate inflation helped boost the GDP growth.
The manufacturing sector grew the most by 10.1 percent followed by the services sector and agriculture, which grew 6.7 percent and 2.6 percent respectively in the last fiscal year, Citi said on Wednesday.
Referring to the 7.2 percent GDP growth target for fiscal 2016-17, Citi said it is imperative to reap the benefits of the favourable demographic characteristics of a large working population to achieve sustainable growth and investment.
“Enhancing the quality of the workforce and addressing the skills gap will help align the supply side factors with supportive fiscal measures.”
The investment-GDP ratio has been set at 34.4 percent, up from an existing 29.38 percent, to support growth this fiscal year, Citi said.
Given the importance of private investment growth in achieving the target, the government has planned on speeding up public investment on infrastructure through its fast track projects.
It said average inflation slid to a 12-year low at 5.92 percent in fiscal 2016 on the back of low food inflation, which was well below the government's target of 6.2 percent.
“Good domestic harvests, low international commodity prices and political stability helped keep inflation manageable,” it said, citing that food inflation dipped to 4.92 percent from 6.68 percent last fiscal year.
However, Citi said non-food inflation surged to 7.45 percent from 5.99 percent during the same period. “The lagged impact of the new pay-scale for government employees and an upward adjustment of gas and electricity prices drove the non-food inflation higher. However, a cut in fuel prices in April helped limit non-food inflation during May and June.”
Exports posted a healthy 9.72 percent growth last fiscal year to reach $34.24 billion, mainly driven by the 10.21 percent growth in apparel exports.
Improvements in workers' safety standards and gradual migration to manufacturing of high-value apparel helped boost exports, Citi said.
“While the growth in RMG is commendable, it is also a cause of concern from a diversification aspect, as it accounted for over 82 percent of the earnings.”
Exports to the US, the biggest single market for Bangladesh, were resilient despite suspension of the generalised system of preferences. “Given the UK's decision to leave the EU, it is crucial for Bangladesh to ensure that existing preferential terms are maintained as the UK is one of the major RMG export destinations for Bangladesh.”
Import settlement during July-May last fiscal year grew marginally by 4.23 percent to $36.66 billion from $35.17 billion in fiscal 2015. “The sluggishness is primarily due to continued low oil prices and a fall in food imports,” Citi said.
In the first 11 months of the last fiscal year, food grain and petroleum imports dropped by 26.34 percent and 28.9 percent respectively. During this period, capital machinery imports grew 12.87 percent, against 20.76 percent in the previous fiscal year, while industrial raw material imports increased 2.61 percent against 3.52 percent a year earlier.
The trade deficit shrank by 12.14 percent to $5.52 billion in fiscal 2016 from $6.28 billion in the previous year, as export growth outpaced import growth. The current account balance grew to $2.96 billion from $1.99 billion over the same period.
A higher current account surplus and an uptick in foreign direct investment helped grow the balance of payments surplus to $5.06 billion from $4.37 billion last fiscal year.
Referring to the government's plan to set up 100 economic zones, Citi said in order to achieve sustainable export growth, ensuring infrastructural support and a sound business climate are key to attracting investors to the economic zones and achieve the much-desired export basket diversification.
It said Bangladesh Bank has announced a pro-growth monetary policy statement for July-December 2016, setting a private sector credit growth target of 16.5 percent this fiscal year, up from 14.8 percent in the previous year's MPS. As remittance declined 2.55 percent to $14.92 billion last fiscal year, Citi said the drop has primarily been due to a plunge in remittance from workers in the Middle East.
The Gulf countries that host a large Bangladeshi Diaspora account for over 65 percent of the country's workers abroad and have been bearing the brunt of continued low oil prices. “This has led to lower spending on infrastructure and construction projects, which provides employment for most Bangladeshi workers abroad.”
In addition, Citi said the weakening of other currencies in some of these countries in recent months also put a negative impact on inward remittance.
With a whopping 20.45 percent growth year-on-year, foreign exchange reserves hit the $30 billion mark for the first time, reaching $30.14 billion at the end June. “Higher current account surplus and higher foreign direct investment helped grow the reserves,” it said.
It said some noteworthy policies and reforms were introduced in the first half of the year, the majority of which were aimed at providing a better investment framework.
Citi said a strong growth in exports and a lull import side resulted in an influx of US dollars during the first half; Bangladesh Bank purchased excess dollars from the commercial banks in line with its monetary policy goals to maintain exchange rate stability and protect external competitiveness.
The weighted average call money rate has come down drastically, and the plunge in rates primarily occurred from October 2015 when the central bank suspended reverse-repo operations, which left the banks overburdened with liquidity amid low domestic private sector credit requirements.
In January 2016, the central bank cut the repo rate from 7.25 percent to 6.75 percent and the reverse-repo rate from 5.25 percent to 4.75 percent, dragging the overnight money market rates further down.
During the first half, Dhaka Stock Exchange remained dreary with a sporadic uptrend while market turnover was stagnant, Citi said. “A trend of profit booking soon after a period of short rally was witnessed, which limited the upward movement.”