Thevakumar Kandiah, country director of Asian Development Bank (ADB), speaks at the launch of ADB's Outlook 2011 at the bank's office in Dhaka yesterday. M Zahid Hossain, senior country specialist, is also seen.Photo: STAR

The Asian Development Bank (ADB) cautioned yesterday higher inflation could affect Bangladesh's macroeconomic stability.

The Manila-based lender projected inflationary pressure is likely to grow due to the sharp rise in global commodity and food prices, the likely further depreciation of taka, the recent hike in power tariff and expected increase in CNG and fuel oil prices.

"Although inflation is still under control, higher inflation could affect the industrial production and macroeconomic stability,” said M Zahid Hossain, senior country specialist of ADB, while launching the Asian Development Outlook 2011 at the bank's Bangladesh office in Dhaka.

“Monetary policies are unlikely to fully counter them (supply side pressures),” said the ADB official, quoting the report.

The outlook is the ADB's flagship annual report that analyses its member countries' macroeconomic indicators and accordingly makes its projection.

The lender projected this year's inflation at 8 percent, which would rise to 8.5 percent next year.

The ADB said a major challenge for policymakers in the country would be to balance the needs for taming inflation and to ensure that credit to the private sector is not stifled.

It warned rising oil and food prices could affect the whole developing Asia's macroeconomic stability.

Food costs across the region hit record highs in February, the ADB said. Also, crude oil prices surged to two-and-a-half-year highs on Monday with Brent crude topping $120 a barrel on fears the ongoing conflict in Libya and unrest across the Middle East could disrupt supplies.

“Inflation expectations can fuel wage-price spiral in the region,” said the report.

The ADB said growth in Bangladesh's gross domestic product (GDP) would likely increase to 6.3 percent this year, up from 5.8 percent in fiscal 2010, mainly due to rebounding export growth. The GDP is projected to grow at 6.7 percent in fiscal 2012.

The ADB's projection on GDP is lower than the government's 6.7 percent for this fiscal year and 7 percent for the next year. However, the ADB said its projections were assumed on stable political and weather conditions, said Hossain.

On the sectoral growth projection, the report said a rise in external demand and higher domestic capacity will increase the industrial production to 7.5 percent this fiscal year, up from 6 percent in the previous year. It will grow further by 7.8 percent in the next fiscal year riding on the improvement in power supply.

The services sector, which accounts for half of the country's $100 billion economy, will rise slightly to 6.7 percent this year, up from 6.4 percent a year ago.

The farm sector is projected to grow at 4.1 percent this year, down from 4.7 percent in fiscal 2010, said the ADB report.

On the fiscal ground, the ADB hailed the robust revenue growth -- 28.4 percent in the first seven months of the current fiscal year till January. The growth is attributed to the rising domestic economic activities and better tax compliance aided by reforms.

Although the report said budgetary allocations for food, fuel and agriculture inputs will be larger this year, fiscal deficit is expected to be contained within the budgeted level of 5 percent, mainly because of under spending for development outlay.

The ADB said current account is likely to show a tiny surplus of 0.2 percent of GDP this year from 3.7 percent in the previous year, due to slow remittance growth and widening trade gap.

Thevakumar Kandiah, country director of ADB, said Bangladesh has three major challenges to exploit its growth potentials. These are: investments in infrastructure, skill development to meet growth requirement and managing the growing urbanisation.

“The government lacks in project development capacity,” said Kandiah, regarding the public-private partnership initiative. “I hope to see some results in 3 to 6 months,” he added.

News: Daily Star/Bangladesh/ Apr-07-2011