bangladesh quarterly economic update · 2015. 4. 20. · 2 bangladesh quarterly economic update...

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BangladeshQuarterly economic updatedecemBer 2014

Bangladesh Quarterly Economic Update

The Bangladesh Quarterly Economic Update (QEU) has been produced by the Bangladesh Resident Mission of the Asian Development Bank since March 2001. The QEU provides information and analysis on Bangladesh’s macroeconomic and sector developments, key development challenges, and policy and institutional reforms. The QEU has wide readership in government, academia, development partners, private sector, and civil society.

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Asian Development Bank. Bangladesh quarterly economic update Mandaluyong City, Philippines: Asian Development Bank, 2014.

1. Economic development. 2. Bangladesh. I. Asian Development Bank.

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Notes: (i) In this report, “$” refers to US dollars, and “Tk” refers to Bangladesh taka. (ii) The fiscal year (FY) of the government ends on 30 June. FY before a calendar year denotes the year in which

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iii

contents

macroeconomic developments 1

highlights 1

sector performance and economic growth 1

agriculture 4

industry 6

services 7

inflation 7

Fiscal management 8

monetary and Financial developments 9

Balance of payments 12

exchange rate 15

capital market 15

Bangladesh Quarterly economic updateiv

vice-president W. Zhang, Vice-President, Operations 1director general H. Kim, South Asia Department (SARD)country director K. Higuchi, Bangladesh Resident Mission (BRM), SARD

team leader S. Rahman, Senior Economics Officer, BRM, SARDteam members S. Viswanathan, Economist, BRM, SARD M. G. Mortaza, Senior Economics Officer, BRM, SARD B. K. Dey, Economics Officer, BRM, SARD F. Ahad, Associate Programs Analyst, BRM, SARD

1

macroeconomic developments

highlights

• Subdued export growth will lower GDP growth in FY2015

• Macroeconomic management remains prudent

• Sector growth affected by lingering political unrest

• Inflation is gradually easing

• Higher investment is constrained by political unrest, electricity and land shortages, skills deficit, and higher business costs

• Slower than targeted broad money growth, despite rise in private sector credit growth

• Financial soundness indicators need to improve

• Balance of payments records a lower surplus due to widened trade deficit

• Political stability vital for macroeconomic stability

sector performance and economic growth1. Gross domestic product (GDP) growth in FY2014 (end of June 2014) is provisionally estimated at 6.1%, slightly up from 6.0% in FY2013. Net exports added to growth as exports grew briskly. Decline in remittances, lower private credit growth, and weaker consumer confidence ahead of the January 2014 election contributed to lower private consumption growth. Investment rose only slightly to 28.7% of GDP in FY2014 from the previous year’s 28.4%, as private investment declined from 21.8% of GDP in FY2013 to 21.4% in FY2014, while public investment rose from 6.6% to 7.3%. Private investment was constrained by dampened investor confidence, infrastructure and skill deficits, and weak investment climate. Public investment rose as the

6.1% GDP growth estimated for FY2014

Bangladesh Quarterly economic update2

government stepped up implementation of election pledges. Foreign direct investment remains low.

2. GDP growth in FY2015 is projected at 6.1% (Figure 1). It will be lower than 6.4%, forecasted by the Asian Development Outlook 2014 Update (ADO 2014 Update), launched in September 2014. Prior to the onset of ongoing political unrest (first 6 months of FY2015), the economy was growing briskly indicating higher growth prospects for the current year. 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 political unrest is undermining brighter growth prospects by affecting private investment and exports. Despite that, continued healthy remittance inflows are expected to support consumption for sustaining growth momentum. Although the country is resilient to domestic and external shocks, GDP growth will be further affected if the political unrest continues.

3. Growth is expected to rise to 6.4% in FY2016, aided by higher remittance and export growth, as well as the continued economic recovery in the United States (US) and the eurozone area. If the political situation stabilizes, 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 ongoing projects, particularly the power plants.

4. Macroeconomic management remains prudent. The central bank’s cautious monetary policy stance together with favorable international oil, food, and commodity prices helped lower the inflation rate. The larger trade deficit along with the deficit in the services account is expected to push the current account balance to a modest deficit at the end of FY2015. The fiscal deficit remains within prudent limits. Inflation will fall in FY2015 with lower food and oil prices in international markets.

5. Bangladesh’s economic and social progress notwithstanding, the country still faces a number of medium- to longer-term challenges. Increasing investment to 30%–35% of GDP is the major challenge to attaining a higher GDP growth trajectory.

6. To scale up investment, the falling trend of private investment during the last 2 years needs to be reversed. Private investment has been constrained by political uncertainty, land and infrastructure shortages, skill deficits, and a weak business climate. In terms of infrastructure quality, Bangladesh is less competitive relative to its potential contenders including Cambodia, the People’s Republic of China, India, and Sri Lanka (Figure 2). Bangladesh needs to increase the quality of roads, ports,

GDP growth in FY2015 will be lower than expected

GDP growth in FY2016 projected to be 6.4%

Prudent macroeconomic management continues

Investment needs to rise to 30%–35%

Private investment constrained by political uncertainty, land and infrastructure shortages, skill deficits, and weak business climate

0

2

4

6

8

10

FY2010 FY11 FY12 FY13 FY14Estimate

FY15Forecast

FY16Forecast

%

Figure 1: GDP Growth by SectorAgriculture Industry Services GDP growth

Sources: Bangladesh Bureau of Statistics. 2014. National Accounts Statistics. June. Dhaka; Asian Development Bank estimates.


railways, electricity supply, and water supply and sanitation. Capacity constraints in government agencies also need to be addressed.

7. According to the World Bank’s Doing Business 2015, Bangladesh ranked 188th of 189 countries on the ease of electricity delivery (Figure 3). Cost of power outages has been estimated to be about 0.5% of GDP. Electrification rates rose from 35% in FY2003 to 62% in FY2013, and transmission and distribution losses were reduced; nevertheless, supply is still irregular and the system is dependent on natural gas. Power outages remain high, as do losses in the transmission and distribution system. Even though installed capacity is over 10,000 megawatts, available capacity is limited to 6,000–7,000 megawatts. The problem is set to get worse, with additional supply required to meet growing demand in the coming years. In addition, major regulatory issues that complicate meeting demand involve higher transaction costs and too many procedures compared with comparator countries.

8. Bangladesh needs to make major progress in cutting the costs of doing business to boost private and foreign investment. The World Economic Forum’s Global Competitiveness Report 2014–2015 ranks Bangladesh 109th of 144 countries surveyed (Figure 4). Strong efforts are needed for streamlining tax payment procedures, getting credit, registering property, and enforcing contracts. Bangladesh ranks 131st on the ease of getting credit compared with India at 36, Sri Lanka at 189, and Pakistan at 131. Contract enforcement, takes 1,442 days, costs 66.8% of the value of the claim, and requires 41 procedures in Bangladesh.

9. Land shortages have emerged as a binding constraint to investment. Unplanned urbanization and population pressures make finding suitable locations for enterprises difficult. Long delays and high cost of property registration, weak land ownership data, lack of automation in land records, and poor zoning laws make the

Meeting electricity demand is a major challenge

Cutting business costs vital to boosting private investment

Land shortages together with inefficient land market constrain higher investment

01234567

BAN IND PRC CAM MYA PAK SRI THA

Index

Overall infrastructure Electricity Roads Railroads Port

BAN = Bangladesh, IND = India, PRC = People's Republic of China, CAM = Cambodia, MYA = Myanmar, PAK = Pakistan, SRI = Sri Lanka, THA = Thailand.

Note: Index scale varies from 1 to 7 (best).

Source: World Economic Forum. 2014. The Global Competitiveness Report 2014-2015.

Figure 2: Comparison of Infrastructure Quality 2014–2015

188188

184147

144140

131115

8343

0 50 100 150 200

Getting electricityEnforcing contracts

Registering propertyResolving insolvency

Construction permitsTrading across borders

Getting creditStarting business

Paying taxesProtecting investors

Note: Ranking among 189 countries; 1 = best, 189 = worst.

Source: World Bank. 2014. Doing Business 2015. Washington, DC.

Figure 3: Private Investment in Bangladesh: Key Regulatory Constraints


land market inefficient. In terms of registering property, Bangladesh ranks 184th of 189 countries, even below neighboring countries, such as Pakistan at 114, India at 121, and Sri Lanka at 131. Registering property in Bangladesh requires eight procedures, 244 days, and costs 7.2% of the property value. Institutional reforms for simplified land transactions and registration, improved land administration and record keeping, and establishment of more economic zones are important for attracting domestic and foreign private investors.

10. 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 commercial banks. Progress has been made in strengthening prudential regulations, enhancing central bank capacity, and allowing more competition through the entry of new private banks. The existence of a well-functioning capital market is also required to increase investment.

11. To boost investment, Bangladesh needs to maintain political stability and improve the quality of governance. The ongoing political unrest, if it lingers, will further decrease investor confidence, and affect annual development program implementation and revenue collection. It may affect macroeconomic stability, pushing up inflation and affect the external balance.

Agriculture

12. Agriculture grew by 3.3% in FY2014 after 2 consecutive years of lower growth; this was aided by good weather and continued government support. Agriculture growth in FY2015 will be lower than expected1 due to production loss of perishable noncereal products because of disruptions in supply, distribution, and marketing. Nevertheless, sector growth is expected at 3.3%, aided by a good crop harvest, continued policy support, and favorable weather. With rising demand for noncrop agriculture products, and positive supply response boosted by improved infrastructure, connectivity, and marketing facilities, agriculture sector growth will rise to 3.5% in FY2016.

1 According to the ADO 2014 Update, sector growth was projected higher at 3.5% for FY2015.

Sound financial system vital for boosting private investment

Political stability is vital

Agriculture in FY2015 is expected to grow by 3.3% as in FY2014

012345678

Mor

e co

mpe

titiv

e

Bangladesh score Maximum Minimum

Source: World Economic Forum. 2014. The Global Competitiveness Report 2014-2015. Geneva.

Figure 4: Bangladesh Scores in 2014–15 Global Competitiveness Index (GCI)


13. According to estimates by the Department of Agriculture Extension, the target for food-grain production is set at 36.2 million tons for FY2015, 1.4% higher than the actual production of 35.7 million tons in FY2014. Of total food-grain production, the target for rice production (aus, aman, and boro) is set at 34.9 million tons, 1.5% higher than 34.4 million tons, the actual rice production, in FY2014. As per the final estimate by Bangladesh Bureau of Statistics, aus (summer rice crop) production was 2.3 million tons on 1.04 million hectares of land, the same as in FY2014 (Figure 5). As the government provided support to about 0.3 million farmers; aus cultivation did not face any dificulties this year. Nevertheless, aus yield remained at the previous year’s level, as farmers were rather interested in cultivation of other high-yielding rice crops. Aman (monsoon rice crop) was produced 13.2 million tons on 5.5 million hectares of land, 1.5% higher than 13.0 million tons in the previous year. Although aman cultivation in the current fiscal year faces some setbacks in the early stage of plantation due to flash floods, replantation efforts of farmers, recouping losses incurred in affected areas, with the support of government organizations contributes to higher yield.

14. The food-grain import target for FY2015 was projected at 3.4 million tons (0.4 million tons of rice and 3.0 million tons of wheat). As of 4 February 2015, food-grain imports totaled 2.5 million tons (0.7 million tons of rice and 1.8 million tons of wheat). Of the total, the government imported only 68,520 tons of wheat due to the sufficient stock of rice, while private imports amounted to 2.4 million tons (0.7 million tons of rice and 1.7 million tons of wheat).

15. The government’s domestic food-grain procurement target for FY2015 was reset at 1.6 million tons (1.4 million tons of rice and 0.2 million tons of wheat). The government procured 1.1 million tons during 1 May–26 October 2014 from the last boro season, and 0.3 million tons of aman during 15 November 2014–4 February 2015.

16. The government’s revised food-grain distribution plan for FY2015 is set at 2.7 million tons. The government distributed 0.8 million tons of food grains (0.5 million tons of rice and 0.3 million tons of wheat) as of 31 January 2015 in the current fiscal year under its food distribution system, 29.6% of planned distribution. Among distribution channels, the highest food-grain distribution was through Test Relief, followed by Vulnerable Group Feeding, Open Market Sale, Essential Priorities, and Vulnerable Group Development.

17. After distribution, the public food-grain stock was 1.3 million tons (1.2 million tons of rice and 0.1 million tons of wheat) as of 5 February 2015, compared with 1.0 million tons a year earlier.

Food-grain import stands at 2.5 million tons as of 4 February 2015

The government procured 1.1 million tons of boro and 0.3 million tons of aman rice as of 4 February 2015

The government had distributed 0.8 million tons of food grains as of 31 January 2015

Government stock of food grains stands at 1.3 million tons as of 5 February 2015

2.3

13.0

2.3

13.2

02468

101214

Aus Aman

Million tons FY2014 FY2015

Source: Bangladesh Bureau of Statistics. Dhaka.

Figure 5: Production of Aus (Summer Rice Crop) and Aman (Monsoon Rice Crop)

Aman production remains higher in FY2015, while aus production maintains the previous year’s level


Industry

18. Industry growth dropped to 8.4% in FY2014 from 9.6% a year earlier, because of supply disruption and weaker consumer confidence resulting from political unrest. At 8.5%, industry sector growth in FY2015 will be lower than expected at the beginning of FY2015,2 as exports, small-scale manufacturing, and construction activities have been affected by the political unrest. However, better performance of large- and medium-scale industries prior to the onset of the unrest is expected to hold up industry sector growth.

19. Industry growth is expected to rise to 9% in FY2016 with brighter prospects for the readymade garments industry following compliance and safety standard reforms together with increased external demand as eurozone economies recover. The industry sector will be boosted by better availability of electricity and infrastructure, as expected new power generation is added to supply and ongoing road and railway projects are completed, and improved business confidence.

20. The quantum index for medium- and large-scale manufacturing industries rose by 14.8% during July–October 2014 over the same period the previous year (Figure 6). The major industrial group, wearing apparel fell by 1.9%, textiles by 13.4%, basic metals by 2.3%, and tobacco products by 2.1%. Food products rose by 54.2%; pharmaceuticals and medicinal chemicals by 87.6%; other nonmetallic mineral products by 14.8%; leather and leather products by 6.7%; fabricated metal products except machinery by 59.7%; printing and reproduction of recorded media by 7.7%; coke and petroleum products by 63.4%; rubber and plastic products by 16.9%; electrical equipment by 6.1%; beverages by 11.2%; wood and cork products by 5.9%; other transport equipment by 7.9%; machinery and equipment by 15.3%; computer, electronic, and optical products by 29.1%; paper and paper products by 11.7%; and chemical and chemical products by 9.3%.

21. The general index for small-scale manufacturing (1995/96 base) rose by 11.4% during July–September FY2015 (Figure 7). Food, beverages, and tobacco rose by 12.1%; and textiles, leather, and apparel by 13.1%. Metal products and machinery rose by 20.9%; chemicals, rubber, and plastic by 6.0%; basic metal industries by 21.6%; paper, printing, and publishing by 4.9%; wood and wood products by 6.4%; other manufacturing industries by 48.2%; and nonmetallic products by 31.1%.2 The ADO 2014 Update projection was higher at 9.2%.

At 8.5%, industry growth in FY2015 will be lower than expected

Industry growth will rise to 9% in FY2016

The quantum index of medium- and large-scale manufacturing rose by 14.8% during July–October FY2015

The general index for small-scale manufacturing rose by 11.4% during July–September FY2015

5.9

16.9

10.8 11.6

8.2 9.0

14.8

02468

1012141618

FY2010 FY11 FY12 FY13 FY14 Jul-OctFY14

Jul-OctFY15

%

Sources: Bangladesh Bureau of Statistics. 2014. Industrial Production Statistics, Monthly Release. August. Dhaka; Asian Development Bank estimates.

Figure 6: Growth of Medium- and Large-Scale Manufacturing Production (base = 2005/06)

10.7

3.3

5.1

9.3

6.35.4

11.4

0

2

4

6

8

10

12

FY2010 FY11 FY12 FY13 FY14 Jul-SepFY14

Jul-SepFY15

%

Sources: Bangladesh Bureau of Statistics. Dhaka; Asian Development Bank estimates.

Figure 7: Growth of Small-Scale Manufacturing Production (base = 1995/96)


Services

22. The services sector grew by 5.8% in FY2014, compared with 5.5% the year before mainly due to higher agriculture growth, and stronger trading activity during the second half of the year. Services growth is expected to moderate to 5.7% from 5.8% in the previous year, as transport, trade, and wholesale and retail business activities have been affected by the unrest. A pickup in external trade and a rise in domestic demand are expected to further increase services growth to 6.0% in FY2016.

inflation23. Following persistently high inflationary pressures until May 2014, the country has witnessed a falling trend in year-on-year inflation since June 2014. The slowing inflationary trend continued during the first 7 months of FY2015, with year-on-year inflation decelerating to 6.0% in January 2015 from 7.5% in January 2014 due to lower food and commodity prices in the international market (Figure 8). Year-on-year food inflation moderated to 6.1% in January 2015 from 8.8% in January 2014. But year-on-year nonfood inflation rose to 6.0% from 5.5%.

24. Urban inflation continued to be higher than rural inflation. Year-on-year urban inflation declined to 6.5% in January 2015, from 8.0% the year earlier. Year-on-year rural inflation moderated to 5.8% from 7.2%.

25. Rural food inflation slowed to 5.8% in January 2015 from 8.4% in January 2014, but rural nonfood inflation rose to 5.8% from 5.2%. Urban food inflation moderated to 6.7% in January 2015 from 9.8% a year earlier; urban nonfood inflation rose to 6.3% from 6.0%.

26. Average inflation decreased to 6.9% in January 2015 from 7.6% in January 2014 (Figure 9). Although an expected increase in gas and electricity prices may put some pressure on prices over the coming few months, average inflation is expected to moderate to 6.5% by the end of June of FY2015 with easing supply constraints, a better crop outlook, a supportive monetary policy, and a sufficient public stock of food grains. Lower food and oil prices in the international market will also contribute.

Services growth will fall slightly to 5.7% in FY2015 as business activities are affected by strikes and blockades

Food inflation moderating, nonfood inflation rising

Average inflation expected to decline to 6.5% in FY2015 from 7.4% in FY2014

02468

10121416

Jul2011

Oct Jan12

Apr Jul Oct Jan13

Apr Jul Oct Jan14

Apr Jul Oct Jan15

%Consumer price index Food Nonfood

Source: Bangladesh Bureau of Statistics. 2015. Consumer Price Index. January. Dhaka.

Figure 8: Inflation, Point-to-Point(base = 2005/06)

02468

1012

Jun12

Aug Oct Dec Feb13

Apr Jun Aug Oct Dec Feb14

Apr Jun Aug Oct Dec

%Consumer price index Food Nonfood

Sources: Bangladesh Bureau of Statistics. 2015. Consumer Price Index. January. Dhaka; Asian Development Bank estimates.

Figure 9: Inflation, 12-Month Moving Average(base = 2005/06)


Fiscal management27. Notwithstanding political unrest, revenue collection by the National Board of Revenue (NBR) grew by 16.7% during July–January FY2015 over the same period of the previous year (Figure 10). Although NBR revenue growth fell short of the target during the first 7 months, it remained close to the overall revenue growth target of 16.8% set for the FY2015 budget over the revised budget of FY2014 due to improved import activity.

28. Revenue collection from income tax during July–January of FY2015 rose by 17.6%. Revenue from domestic indirect taxes grew by 18.3% during the same time. Collection from domestic value-added tax rose by 17.4%, supplementary duty by 17.1%, excise duty (confined to manually made cigarettes, brickfields, and cinema halls) by 85.8%, and turnover tax by 9.1%.

29. Revenue collection from import-based indirect taxes grew by 13.6% during July–January FY2015. Likewise, supplementary duty collection rose by 20.0%. Import-based value-added tax increased by 15.2%, and export duty by 23.7%.

30. Although the authorities made significant progress in a range of structural reforms under the International Monetary Fund’s extended credit facility supported program, efforts are still under way to strengthen the tax administration, including identifying skilled personnel and experts for better positions, taking legal action against tax defaulters, and awarding large taxpayer organizations and individuals to boost revenue generation.

31. The FY2015 budget targets 19.3% growth in tax revenue, to lift the tax/GDP ratio to 10.1% from 9.6% in FY2014, which is higher than nominal GDP growth. This may be a challenge, especially amidst economic activities affected by political unrest, unless discretionary tax measures are adopted. The target of 4.4% growth in nontax revenue may also be a challenge.

32. The annual development program (ADP) utilization rate remained at 32.0% during July–January of FY2015, reflecting the similar trend in recent years (Figure 11). Out of the first seven months utilization, spending by domestic resources was 67.0%, while the utilization of foreign-aided projects stood at 33.0%. The top 10 ministries and divisions,

NBR revenue grew by 16.7% during July–January FY2015

Income tax collection rose by 17.6% and domestic indirect taxes grew by 18.3% during July–January FY2015

Import-based taxes record higher growth

NBR tax reform under way aiming at fiscal sustainability

ADP utilization rate remains at 32.0% during July-January of FY2015

225.2 183.1 186.4

3.6

598.3

266.5208.1 219.1

4.8

698.5

0100200300400500600700800

DomesticIndirect Taxes

Import Taxes Income Taxes Other Taxes Total

Tk billionFY2014 FY2015

Source: National Board of Revenue. 2015. Statement of Revenue Earnings (Provisional). January. Dhaka.

Figure 10: Revenue Collection by the National Board of Revenue (July–January)

33 3438

33 32

01020304050607080

FY2011 FY12 FY13 FY14 FY15

%

Figure 11: ADP Implementation (July–January)

Source: Ministry of Planning. 2014. ADP Implementation Progress, Monthly. December. Dhaka.


which received 71.0% of total ADP allocations, utilized only 33.0% of their total allocations. The Local Government Division utilized 42.0% of its allocation. Better performance was also demonstrated by the ministries of education, utilized 40.0%; primary and mass education 35.0%; and road transport and highways division 34.0%. The Power Division utilized 33.0%, Energy and Mineral Resources Divisions 30.0%, Bridges Division 28.0%, and the Ministry of Railway and Ministry of Health and Family Welfare both utilized 24.0%. Utilization by the Ministry of Housing and Public Works remained low at 23.0%.

33. During the first half of FY2015, deficit financing was lower at Tk183.8 billion compared with Tk185.4 billion during the same period of FY2014, a decrease of 0.9%. Domestic sources financed about 54.4% of the total deficit. Political unrest has affected the vital foreign exchange mobilization rate. Of the total domestic financing (Tk100.1 billion), the government borrowed a negative 49.0% from the banking system, and 149.0% from the nonbanking system.

monetary and Financial developments34. Broad money (M2) grew slowly by 12.8%, year-on-year in November 2014, down from 16.7% in November 2013 (Figure 12); growth remained lower than the half yearly (July–December 2014) monetary program growth target of 16.0%. A drastic fall in net credit growth to the government led to slower growth in broad money. Growth in net credit to the government fell sharply from 15.6% in November 2013 to 0.7% in November 2014 because of higher government borrowing through sales of national savings certificates and better tax collection. Despite weak domestic demand, private domestic credit growth increased to 12.7% in November 2014 from 11.0% in November 2013, still remaining below the December 2014 target of 14.0%. Although domestic credit growth rose marginally to 11.0% in November 2014 from 10.6% in November 2013, the growth of net foreign assets declined to 25.6% from 38.4%, reflecting lower growth in export earning.

35. Reserve money grew strongly, reaching 14.3% year-on-year in November 2014, up from 13.6% in November 2013 (Figure 13), remaining lower than the December 2014 target of 15.5%. The higher reserve money growth was caused by the high growth in the central bank’s net foreign assets, despite a steep decline in net domestic assets. The large decline in lending by the central bank to the

Fiscal deficit financing was 0.9% lower during July–December FY2015

Money supply growth is lower than the program target

Reserve money growth is lower than the target

-50-30-10

1030507090

Jan11

Jul Jan12

Jul Jan13

Jul Jan14

Jul

%

Broad money Net credit to governmentCredit to other public enterprises Credit to private sector

Source: Bangladesh Bank. 2015. Monthly Economic Trends. January. Dhaka.

Figure 12: Growth of Monetary Indicators

0

5

10

15

20

25

30

Jan 11 Jul Jan 12 Jul Jan 13 Jul Jan 14 Jul

%

Source: Bangladesh Bank. 2015. Monthly Economic Trends. January. Dhaka.

Figure 13: Growth of Reserve Money


government and to deposit money banks contributed to the slower growth in net domestic assets. The growth in the net foreign assets of the central bank declined to 28.1% in November 2014 from 43.4% in November 2013. While net claims on the government declined by 126.9% in November 2014 compared with the 52.6% decline in November 2013, claims on banks declined by 4.9% compared with the 48.4% decline in November 2013.

36. In conducting monetary policy, Bangladesh Bank undertakes regular auctions of Treasury bills of different maturities with necessary adjustments in their yields, and repo and reverse repo operations to regulate liquidity growth in the banking system with a focus on containing inflation and supporting growth. The central bank kept its main policy rate (repo) unchanged at 7.25% with average inflation still remaining above target. Reflecting Bangladesh Bank’s tighter monetary policy measures, demand for Treasury bills rose and interest rates on the longer matured Treasury bills declined. The weighted average yield of 91-day Treasury bills rose marginally to 7.5% in December 2014 from 7.4% in December 2013. However, the yields of 182-day bills declined to 7.9% from 8.2%, and of 364-day bills to 8.2% from 9.3%. The weighted average yield of 30-day Bangladesh Bank bills declined to 5.3% in December 2014 from 7.1% in December 2013. The unchanged policy rates and lower Treasury bill yields are consistent with the central bank’s objective of stimulating investment and growth, keeping in view downward inflationary trends.

37. Despite the festival season and the banks’ financial year closing, the call money rate remained stable due to lower credit demand from business and the central bank’s close monitoring of the day-to-day liquidity position in the money market. The interbank call money rate was 7.9%, on a weighted average basis, in December 2014, marginally up from 7.1% in December 2013.

38. Scheduled banks’ excess liquidity remained high at Tk1,075.3 billion at the end of December 2014, up from Tk957.0 billion at the end of December 2013. Despite the declining interest rate of commercial banks, the cautious monetary policy stance, as well as significant sterilization operations conducted by the central bank and the sluggish business activity reduced demand for credit, contributing to the buildup of liquidity in the banking system. The outstanding borrowing of the government through sales of national savings directorate certificates stood at Tk895.3 billion at the end of December 2014, up from Tk685.5 billion a year earlier, partly offsetting the decline in net credit growth to the government from the banking system.

39. The weighted average lending and deposit rates of commercial banks have been declining. The weighted average lending rate declined to 12.5% at the end of December 2014 from 13.5% a year earlier (Figure 14). The deposit rate declined to 7.3% from 8.3%, remaining positive in real terms because of lower inflation. While lower private credit demand and higher competition among banks

Monetary policy focuses on containing inflation and supporting growth

Interbank call money rate remained stable

Excess liquidity of commercial banks rose

Year-on-year interest rate spread remained unchanged in December 2014

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2011 2012 2013 2014

%Nominal deposit Real deposit Nominal lending Real lending

Source: Bangladesh Bank. Economic data. http://www.bangladesh-bank.org/econdata/w_avg_interest.php

Figure 14: Nominal and Real Interest Rates


contributed to the decline in the lending rate, the large excess liquidity in the banking system contributed to the lower deposit rate. The interest rate spread of the banking system remained unchanged at 5.2 percentage points as in December 2013.

40. Despite tightened monetary measures, disbursement of industrial term lending rose strongly. In the first quarter of FY2015, disbursement of industrial term lending rose by 44.2% to Tk128.1 billion from Tk88.8 billion a year earlier. Although disbursement to small and cottage industries declined sharply by 25.9%, disbursement to large-scale industries increased strongly by 61.1% (accounting for 80.6% of total industrial term lending) and to medium-sized industries by 14.9% (14.4% of total funds).

41. In addition, loans to agriculture and small and medium-sized enterprises (SMEs) were given priority considering their role in contributing to inclusive economic growth and job creation, in line with Bangladesh Bank’s policy directives. Of the Tk155.5 billion targeted for new credit disbursement to agriculture (including nonfarm rural credit) in FY2015, Tk70.7 billion was actually disbursed during the first 6 months of the year, a decline of 5.1% over the same period of FY2014. Outstanding loans to SMEs reached Tk1.4 trillion in December 2014, 17.5% growth over December 2013. The ratio of SME loans to total loans in the banking system rose to 24.5% in December 2014 from 23.9% in December 2013.

42. The half-yearly monetary policy statement (MPS) for January–June 2014 targets reducing average inflation to 6.5% by June 2015, while ensuring adequate credit growth to achieve respectable economic growth. The MPS projects that year-on-year M2 growth will remain within 16.5% in December 2014 and private sector credit growth within 15.5%. The central bank pays continued attention to the need for fiscal–monetary coordination and the necessity of tracking government borrowing to help keep it within the limit set in the budget. It will continue to strengthen its focus on finance sector stability and capital market development. The central bank will continue supporting a market-based exchange rate with reducing excessive rate volatility, and maintaining adequate foreign currency reserves to cover imports of 5–10 months.

43. Financial soundness indicators for the banking system weakened as indicated by the gradual increase in gross nonperforming loans (NPLs). The ratio of gross NPLs to total loans in the banking system rose to 9.7% at the end of December 2014 from 8.9% at the end of December 2013 (Figure 15). The gross NPL ratio for state-owned commercial banks (SCBs) increased to 22.2% at the end of December 2014 from 19.8% at the end of December 2013, the gross NPL ratio for private commercial banks rose to 5.0% from 4.5%, and for specialized banks to 32.8% from 26.8%. The gross NPL ratio for foreign banks also increased to 7.3% from 5.5% during the same period. The net NPL ratios for all banks rose to 2.7% at the end of

Disbursements of industrial term loans rose strongly

Loans to agriculture and SMEs are being prioritized

Financial soundness indicators weakened

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Foreign commercial banks

Figure 15: Gross Nonperforming Loan Ratios by Type of Bank

Source: Bangladesh Bank. 2015. Bangladesh Bank Quarterly. July–September 2014. Dhaka.


December 2014 from 2.0% at the end of December 2013. The net NPL ratios for SCBs and specialized banks remained higher than the sector average. Although the regulatory capital position of banking improved in general, in terms of the risk-weighted capital–asset ratio, SCBs are short (by 1.3%) of meeting the regulatory requirement of 10.0%, while specialized banks had a larger shortfall.

44. The performance of SCBs has deteriorated and the asset quality remained low, mainly reflecting weak credit decisions which also contributed to lower financial soundness. In addition to the concern expressed by the central bank in the latest MPS, it has taken steps to improve the financial position of SCBs through enhanced supervision and corporate governance such as deploying the Real Time Electronic Dashboard. With the new authoritative power on SCBs, the central bank aims to improve banking governance by encouraging creditworthy borrowers and ensuring strong lawful consequences for habitual defaulters.

Balance of payments45. Weak performance of export earnings has continued since the beginning of FY2015. After growing marginally by 0.9% during the first quarter of FY2015, exports increased by 1.6% for the first half of FY2015, against the high growth of 16.6% in the first half of FY2014. Exports rose by only 2.1% in the first 7 months of FY2015 over the corresponding period of FY2014 (Figure 16). Weaker orders executed in FY2014 during political unrest before the parliamentary election partly explain the decline in payments made currently to exporters and thus the slower export growth.

46. Ready-made garment exports—accounting for about 81.1% of total export earnings—grew by only 1.9% in the first 7 months of FY2015, significantly down from 17.7% growth in the first 7 months of FY2014. While exports of woven garments rose marginally by 1.2%, earnings from knitwear rose by 2.6%. Garment exports to the European Union rose by 5.2%, but declined by 3.6% to the US. Woven exports to the European Union rose by 8.7% and knitwear exports by 2.9%; woven exports to the US dropped by 5.2% and knitwear exports rose by 1.7%.

47. Among the other major export items, earnings from agriculture products rose by 17.4%, engineering products by 23.5%, and jute goods by 9.3%; earnings from frozen foods declined by 5.1%, petroleum products by 69.9%, leather by 15.8%, and raw jute by 4.8%.

Asset quality of state-owned banks needs improvement

Exports grew by only 2.1% during July–January FY2015

Garment exports rose by 1.9% in July–January FY2015

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Sources: Export Promotion Bureau. 2015. Export Performance for the Month of January 2015. Dhaka; Asian Development Bank estimates.

Figure 16: Growth in Exports and Components


48. Export earnings from the European Union—the key source of the country’s export earnings—grew by only 4.3% in the first 7 months of FY2015 to $9.8 billion (55.1% of total export earnings); earnings from the US declined by 2.9% to $3.2 billion (18.0% of the total). Export earnings from newly discovered markets also rose negligibly. During the first 7 months of FY2015, export earnings from 13 such economies grew by only 0.03% to $3.4 billion (19.2% of total export earnings);3 garment export earnings from these countries dropped by 0.6% to $2.2 billion (15.5% of total garment export earnings).

49. Given the current trend of exports receipts, attaining the annual export target of $33.2 billion for FY2015 (10.0% higher than actual exports in FY2014) will be a challenge. Although efforts are ongoing to promote exports, including increasing the size of the Export Development Fund, the reemergence of political unrest since January 2015 poses threats to export prospects. Delayed recovery in the European Union, Bangladesh’s main export destination, and the recent strong appreciation (13.2% in December 2014 over December 2013) of the taka against the euro may have an adverse effect on exports to the eurozone. Following the fire and building collapse accidents, progress has been made in improving safety standards and worker rights in the garment industry. Other challenges, e.g., improving power supply, transport infrastructure, logistics including port facilities, and urban services; and developing skills need to be addressed to enhance market access and boost exports.

50. Import payments (recorded by customs) rose strongly by 18.3% in July–December 2014 over the corresponding period of 2013, with stronger imports of food grains (mainly rice), intermediate goods, and capital goods (Figure 17). However, imports of consumer goods rose weakly by only 2.5% due to lower imports of edible oil and sugar. Food-grain imports rose by 50.0% because of rapid growth (439.0%) in rice imports. While imports of intermediate goods rose by 20.4%, imports of capital machinery rose significantly by 42.6% indicating a revival in business activity. Among intermediate goods, petroleum imports rose by 83.9%, chemicals by 11.0%, fertilizer by 60.6%, dyeing and tanning materials by 28.5%, and raw cotton import by 1.9%; while oil seeds declined by 24.0% and pharmaceutical products by 33.4%.

51. During July–December 2014, the total value of import letters of credit opened rose by 13.2% because of an increase in letters of credit for food grains (30.3%), intermediate goods (13.5%), industrial raw materials (11.8%), and other consumer goods (16.8%). The value of import letters of credit opened declined for petroleum and petroleum products (12.9%).

3 Australia; Brazil; Canada; the People’s Republic of China; Hong Kong, China; India; Japan; the Republic of Korea; the Russian Federation; South Africa; Thailand; Turkey; and the United Arab Emirates.

Export earnings from the European Union grew slowly

Attaining the export target will be a challenge

Imports rose by 18.3% in July–December 2014

Import letters of credit rose by 13.2% during July–December 2014

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%

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Source: Bangladesh Bank. Economic data. http://www.bangladesh-bank.org/econdata/bop/imp_pay_marchandise.php

Figure 17: Growth in Imports and Components


52. Earnings from remittance inflows increased by 8.7% to $8.7 billion during July–January FY2015 over the corresponding period of FY2014 when they totaled $8.0 billion (Figure 18). Remittance inflows from Oman rose by 38.9%, Malaysia by 30.5%, United Arab Emirates by 7.9%, Saudi Arabia by 5.9%, and the US by 3.1%; while remittance inflows from the United Kingdom declined by 13.8% and Kuwait by 1.9%. Despite the drop in out-of-country employment in the last couple of years, seasonal factors contributed to the recent rise in the growth of remittance inflows, as traditionally remittances rise during festivals such as Eid. As the productive use of remittances would contribute much to economic growth, attention is needed to develop workers’ skills for out-of-country jobs, which could help boost remittances in the coming years.

53. Out-of-country jobs for Bangladeshi workers rose by 4.6% during July–January FY2015 indicating a likely rise in remittance inflows in the remaining months of FY2015 (Figure 19). A total of 246,040 Bangladeshis found jobs outside the country during the period, compared with 235,113 in the corresponding period of FY2014. While recruitment in Qatar rose by 59.8%, Saudi Arabia by 48.9%, United Arab Emirates by 44.4%, Bahrain by 4.4%, and Jordan by 1.1%, jobs for Bangladeshi workers declined in Oman by 21.0% and Singapore by 6.6%. Remittances are expected to remain healthy because of resumed recruitment of Bangladeshi workers by Saudi Arabia and Qatar.

54. While net foreign direct investment (FDI) rose marginally, net receipts of foreign aid inflows decreased. Net FDI was $702.0 million in July–December 2014, up from $664.0 million in the corresponding period of 2013. The net receipt of foreign aid (loans and grants) inflows was $975.2 million during July–December 2014, down from $1.1 billion in the same period of 2013.

55. The trade deficit widened largely to $5.3 billion in July–December 2014, from $2.4 billion in July–December 2013, as the growth in export receipts was much slower than for import payments. Despite the higher receipts from workers’ remittances, larger deficits in the trade, services, and primary income accounts compared with a year earlier pushed the current account balance to a deficit of $1.4 billion in the first 6 months of FY2015, from a surplus of $1.4 billion, the year earlier.

Remittance inflows increased by 8.7% during July–January FY2015

While net FDI grew, net receipts of foreign aid decreased

Larger trade, services, and primary income deficits led the current account into a deficit

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Source: Bangladesh Bank. 2014. Monthly Economic Trends. January. http://www.bangladesh-bank.org/pub/monthly/econtrds/jan15/statisticaltable.pdf

Figure 19: Out-of-Country Employment Growth

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Source: Bangladesh Bank. Economic data. http://www.bangladesh-bank.org/pub/monthly/econtrds/jan15/econtrds.php

Figure 18: Growth in Remittances


56. The combined capital and financial accounts recorded a significantly higher surplus of $3.4 billion in July–December 2014, significantly up from the surplus of only $629.0 million in July–December 2013 because of a significantly higher surplus in net trade credit. Despite the larger capital and financial account surplus, the even higher current account deficit led the overall balance to show a lower surplus of $1.4 billion in July–December 2014, down from the surplus of $2.6 billion in July–December 2013.

57. Bangladesh Bank’s gross foreign exchange reserves rose sharply to $22.0 billion (nearly 6 months of imports) at the end of January 2015 from $18.1 billion a year earlier (Figure 20). Bangladesh Bank accumulated a large amount of foreign exchange through purchases from commercial banks to prevent the taka from appreciating and eroding the country’s export competitiveness. Also, the strong rise in remittance inflows contributed to the large reserve accumulation.

exchange rate58. The nominal (taka–dollar) exchange rate at the end of January 2015 remained stable at Tk77.8 = $1.00 as at the end of January 2014 (Figure 21). Despite higher import demand and lower export growth, higher remittance inflows contributed to the stable exchange rate. However, the nominal effective exchange rate appreciated by 5.0% year-on-year in December 2014, with larger foreign exchange reserves. Because of the higher nominal appreciation and higher domestic inflation relative to that of trading partners, Bangladesh’s real effective exchange rate appreciated by 6.5% year-on-year as of the end of December 2014, implying some erosion in export competitiveness.

capital market59. The major stock market indicators improved as ongoing reform programs enriched market discipline and monitoring. As a result, investors also injected more money into securities. The Dhaka Stock Exchange (DSE) broad index grew by 14.0% in

Overall balance shows a lower surplus

Gross foreign exchange reserves rose strongly

Exchange rate remains stable

Major stock market indicators improved

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Source: Bangladesh Bank. 2015. Major Economic Indicators: Monthly Update. January. http://www.bangladesh-bank.org/pub/monthly/econtrds/jan15/statisticaltable.pdf

Figure 20: Gross Foreign Exchange Reserves

758085909510010511011512012513013565

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Source: Bangladesh Bank. 2015. Monthly Economic Trends. January. http://www.bangladesh-bank.org/pub/monthly/econtrds/jan15/econtrds.php

Figure 21: Exchange Rates


December 2014 over December 2013, reaching 4,865.0 points (Figure 22). The market price–earnings ratio rose to 17.8 in December 2014 from 15.1 in December 2013, reflecting some price recovery in the market. In addition, a total of 17 new companies were listed on the DSE in 2014. DSE market capitalization rose by 23.1% in December 2014 over December 2013. Net foreign portfolio investment rose to $445.0 million in July–December 2014 from $273.0 million in July–December 2013.

60. The Chittagong Stock Exchange (CSE) selected categories index largely followed the trends of the DSE broad index. In December 2014, the CSE index rose by 8.1% over December 2013, and CSE market capitalization rose by 28.9% during the same period.

61. The recent increase in foreign portfolio investment and increasing numbers of initial public offerings help the market grow. Reforms such as the demutualization of stock exchanges, and enhanced surveillance of brokerage houses and merchant banks to improve market discipline and strengthen market monitoring helped increase investor confidence. Due to lower deposit interest rates in banks, investors are looking for higher returns from stock investment. Market confidence will need to be restored through enhancing supply and demand for equities, upgrading accounting and auditing requirements to international standards to supervise companies’ internal controls, and accounting policies.

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Source: Bangladesh Bank. 2015. Major Economic Indicators: Monthly Update. January. http://www.bangladesh-bank.org/pub/monthly/selectedecooind/magecoindjan2015.pdf

Figure 22: Dhaka Stock Exchange: Market Capitalizationand Broad Index


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Bangladesh Quarterly Economic Update

The Bangladesh Quarterly Economic Update (QEU) has been produced by the Bangladesh Resident Mission of the Asian Development Bank since March 2001. The QEU provides information and analysis on Bangladesh’s macroeconomic and sector developments, key development challenges, and policy and institutional reforms. The QEU has wide readership in government, academia, development partners, private sector, and civil society.

About the Asian Development Bank

ADB’s vision is an Asia and Pacific region free of poverty. Its mission is to help its developing member countries reduce poverty and improve the quality of life of their people. Despite the region’s many successes, it remains home to approximately two-thirds of the world’s poor: 1.6 billion people who live on less than $2 a day, with 733 million struggling on less than $1.25 a day. ADB is committed to reducing poverty through inclusive economic growth, environmentally sustainable growth, and regional integration.

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