State of Bangladesh economy in FY2007-08 (I)

First six months of FY2007-08 (henceforth FY08) have passed. During this period, the economy faced two successive floods in August and September, devastating cyclone Sidr in November and increased prices of essential commodities. These have raised concerns as to whether the macroeconomic targets set for FY08 could be achieved. The present review assesses the performance of major macroeconomic indicators. The review analyses the performance of the public finance and monetary sector, and the real sector.
Public Finance and Monetary Sector
Revenue Earnings and Expenditure: During July-November of FY08, revenue earnings by NBR had 22.4 percent growth while collection of income tax registered 44.0 percent growth. Introduction of the universal self-assessment system has played a positive role in this context. Revenue expenditure (July-August of FY08) had higher growth (30.7 per cent) than the targeted growth (15.6 percent). So, mobilising additional revenue will be a key challenge.
Annual Development Programme (ADP): During July-October of FY08, ADP expenditure (Tk 3,042 crore) was 11 percent of the annual target. In view of the consecutive floods and the cyclone, a review and restructuring of the ADP would be required, and funds need to be diverted towards rehabilitation efforts.
Budget Deficit: Planned budget deficit in FY08 is very high (5.6 percent of the GDP, against 3.7 percent of FY07). Government borrowing from domestic sources increased significantly by 33.3 percent, mostly from the banking sources. Government borrowing is expected to surpass the target because of high government expenditure for post-Sidr rehabilitation. Notably, commendable success was achieved in mobilising foreign resources. Net foreign financing amounted to Tk 1,642.74 crore during July-October of FY08, against Tk 163.51 crore during the same period of FY07.
Monetary sector: At the end of October 2007, money supply (in terms of M3) posted 13.23 percent growth. Reserve money registered a marginal rise of 5.68 percent and excess liquidity of the scheduled banks was almost steady. Total outstanding domestic credit to the private sector posted a moderate growth (16.84 percent) on a point-to-point basis. Disbursement of term loans targeting industrial sector registered a positive growth during July-September 2007. Taka appreciated by 1.85 percent against US dollar in November 2007, though it rapidly depreciated against Euro and Indian Rupee.
Real Sector
Agriculture: Foodgrain production in FY08 is likely to be 1.2 to 2.0 million metric tons (4.4 percent to 7.4 percent) lower than actual production of FY07. It is mainly due to the damage by flood and Sidr and partly due to lack of fertilizer availability. Estimated loss of livestock sector, affected by Sidr is about Tk 132.26 crore. Coastal fisheries, particularly the shrimp farms, were severely affected.
In view of large scale agricultural rehabilitation in flood and Sidr affected areas, the government disbursed substantial amount of credit. During July-November of FY08, total credit disbursement stood at Tk 1,869.3 crore (6.6 percent higher than comparable months of FY07). The government needs to focus on mobilizing more funds for agricultural credit, particularly for the upcoming boro season.
Price Level and Inflation: Low levels of production in the domestic market, rising prices in the international markets and supply disruption were the major instigating forces behind high inflationary trend. Import of foodgrains has failed to meet the gap in view of the requirement and the production loss caused by flood and Sidr, even though it was notably higher in FY08 (726,000 mt) than that of last year (143,000 mt). Increased price at the international level, and export restriction imposed by some countries limited imports by Bangladesh.
Industry: Industrial sector was not able to overcome the decline in growth rates during the first half of FY08 because of negative production growth in jute, cotton, RMG and leather sectors. Government's decisions of shutting down 4 state-owned jute mills and retrenchment of 14,000 workers along with other measures in view of restructuring the jute sector have raised lot of concerns.
During the first quarter of 2008, import of capital goods and others have increased by 14 percent, but total amount of LCs for import of machineries declined in following months. Import of industrial raw materials and machinery for miscellaneous industries had registered positive growth during July-October 2007. This perhaps indicates that business activities picked up in terms of current production but entrepreneurs were reluctant to make new investment.
Foreign Investment: Total foreign investment posted a rise by 11.1 percent during July-October 2007, but FDI experienced a fall of -4.0 percent. Portfolio investment experienced a substantial rise. A sharp decline in investment registration indicates that foreign investors have been losing interest to consider Bangladesh as a possible destination. In order to establish confidence of foreign investors, the government should come up with decisions regarding the pending major investment proposals, and also look into the constraints both in terms of infrastructure and regulatory mechanisms that inhibit FDI. The proposed coal policy, if approved without delay, could develop this potentially important source of energy.
Capital Market: DSE's all price index recorded an increase by 749.22 points (41.1 percent) during July-December 2007. Market capitalisation rose to 742.2 billion on 30 December 2007 (compared to 315.4 billion on 30 December 2006) taking the market capitalisation to GDP ratio to 15.9 percent. Entrance of the Grameen Phone in the stock market would encourage other large-scale companies, especially foreign owned companies, to off-load their shares in the stock market.
External Sector: Aggregate export declined in July-August 2007 (-12.1 percent), mainly due to the fall of RMG exports. In view of the set export targets for woven (19.1 percent) and knit (20.0 percent) products for FY08, export of these two sectors will need to increase by 28.9 percent and 31.2 percent respectively, during the rest of the year. This will be a difficult task with the sanctions on China being phased out as of 01 January 2008.
A large part of increasing import in recent months is accounted for by the rise in international market prices, and less to rise in volume. Total imports during the July-October period of FY08 posted a growth rate of 20.0 percent. In monetary terms, high growths were observed for the import of rice (596.8 percent), wheat (88.4 percent) and fertiliser (106.7 percent).
During July-November of FY08, remittance sent by migrant workers was US$ 2,806.4 million (21.7 percent higher than comparable months of FY07). While the high flow of workers' remittances is expected to continue in the coming months, anticipated higher import payments combined with falling exports might create further pressure on the BoP position in the near future.
Given the challenges lying ahead, the next six months of FY08 will be critical for Bangladesh in terms of achieving sectoral targets as well as maintaining macroeconomic balances. The performance of the economy will also be important for implementing the election plus agenda of the government.