Bangladesh's economic growth may slow in two back-to-back years due to falling exports and a hike in interest rates, the Asian Development Bank (ADB) said yesterday.

The ADB projected the country's GDP growth at 6.2 percent for fiscal 2012, down from 6.7 percent a year ago. The government, however, expects this fiscal year's GDP to be 7 percent.

In the Asian Development Outlook released throughout the Asia-Pacific region, the ADB also said GDP would further slip to 6 percent in the next fiscal year.

The forecast comes in line with other Asian economies that will experience flat growth this year before recovering in 2013.

The GDP growth this fiscal year is expected to slow with a slowdown in exports -- the country's main growth driver -- as the year progresses, ADB Country Director Teresa Kho told reporters in Dhaka yesterday.

In the next fiscal year, the growth will further decrease as interest rates are raised to bring down inflation and export growth is slowing further, ADB Senior Country Economist Zahid Hossain said in his presentation on the economy.

Kho said the external economic environment for the developing countries, including Bangladesh, remains unfavourable as the eurozone fell into a prolonged period of debt adjustments, and the US recovery still remains weak.

She also said domestic demand has also weakened with rising interest rates, following the adoption of credit tightening measures to rein in inflation.

Industrial growth will be lower because of the weakening in domestic and external demand conditions, Kho said, adding that agriculture growth will slow mainly because of the high base in the previous year.

Citing a number of risks to the economy, Kho said macroeconomic management, however, began to come under pressure, as the current fiscal year unfolded. Inflation rose rapidly.

Kho said the balance of payments came under strain from higher oil imports for power generation, in the face of weakened exports.

Reserves fell and the taka depreciated significantly, she said, adding that the external current account is expected to move into a deficit, the first time in more than half a decade.

“Fiscal pressures were also built up because of rising subsidies on fuel and electricity,” she said. To finance the subsidies, the government had to borrow heavily from the banking system, as foreign assistance declined and revenue growth was slower than in the previous year, she added.

Kho also said project implementation continues as a weak area, as evidenced by the recent cut in the annual development programme.

Bangladesh needs to reduce its growing fiscal and external imbalances and cut subsidies by adjusting fuel and electricity prices, she said.

The senior country economist said the country needs to create space for more-acutely needed-outlays on infrastructure and human development, and reduce the budget's excessive domestic borrowing.

Hossain said the business climate needs to be substantially improved, to scale up private investment, including foreign direct investment.

To mobilise resources for closing the large infrastructure gaps, greater private participation in infrastructure development, including public-private partnership, is needed, Hossain said.

Bangladesh has several strategic advantages, including low-cost labour and location in a fast-growing region, which can help attract large FDI into light industry, he said.

In several Asian countries, labour costs are fast rising, opening up prospects for foreign investors to relocate investment to Bangladesh, he said.

To attract greater FDI flows, it is essential to remove infrastructure bottlenecks, make land more readily available, upgrade skills of the labour force and remove administrative delays and impediments, he said.

The Daily Star/Bangladesh/ 12th April 2012